Airline Landscape More Receptive to Mergers

(Originally published in McGraw-Hill's Aviation Daily, 12/22/2006)

Much has been written (and will be) about the history of airline mergers to suggest that mergers in the present industry environment – such as the US Airways-Delta proposal – cannot work. Students of airline history pointing exclusively to the carcasses of failed mergers fail to acknowledge evolutionary trends marking the prospect for future success.

Today's competitive landscape is very different than five years ago, let alone longer, which re-sets the conditions for successful mergers.  Positive results achieved in the US Airways-America West merger to date underpin CEO Doug Parker's optimism for a Delta-US Airways combination.

What changed?  Network carriers dramatically reduced costs, consensually and through bankruptcy – shedding aircraft, reworking labor contracts and recently, embracing capacity discipline.  Noting this trend, Parker and his team became convinced that infusing a bankrupt carrier (like US Airways) with known working business processes of a structurally low-cost carrier (America West) presented an opportunity to buck the "bad merger" trend and pull a proverbial rabbit out of his hat.

It was a good hunch:  The US Airways-America West combination is profitable, created greater cost synergies than predicted, provides greater job security for US Airways employees (experiencing profit sharing for the first time in many years) and dramatically enhanced value for shareholders, whose stock has almost tripled in fifteen months.

The most profound change in industry dynamics is the nationwide impact of low-cost carriers, who offer more than 20 percent of domestic capacity (more in East Coast markets) and impose a marketplace discipline of their own.
Today’s low-cost carriers are viable, growing airlines with competent managers who are keeping price and service competition alive and well.  Southwest, AirTran and jetBlue have hefty aircraft order books and anticipate entry into markets such as the Northeast Corridor (one of the shuttles operated by Delta and US Airways and other airport assets would likely be sold to address antitrust concerns).

Concerns over abandonment of smaller markets served by Delta or US Airways are misplaced.  US Airways promises continuing service to every destination served by the two airlines today, although those flights may (and arguably should) shift from one hub to another.

Concerns over fare hikes are similarly misplaced.  America West has long been a low-fare maverick.  Since merging with US Airways, the combined airline has lowered prices by as much as 83 percent in hundreds of business and leisure markets.
Is all rosy at US Airways?  Hardly.  Parker candidly concedes that some things should have gone better.  The combined web site launched clumsily, reservations systems have yet to merge, and the airlines' most important hub continued to suffer from short staffing and equipment failures.  All are being addressed.  This is a management team that is quick to learn from mistakes, not to be repeated.

Despite rhetoric typifying airline labor negotiations, the new US Airways has made quiet progress, achieving single contracts for reservations and passenger service agents, and continues talks toward single agreements with pilots, flight attendants and mechanic-and-related employees.  Parker is keenly aware of the importance of employee expectations and buy-in, and is out among employees regularly, earning their trust.  The company is unusually candid and responsive to employee concerns, and proud to have been able to re-call 700 employees and hire another 4,000 since the merger.

Conversations with US Airways employees show that many are guardedly optimistic about a potential merger with Delta – even knowing how hard they worked to merge two smaller airlines.

No surprise.  Many of these employees joined an airline industry then known for bold moves and expansive career paths.  Today's prospects for growth and enhanced job security are a welcome change from five years of calamitous events and uncertainty.

Parker says he is eager to provide the life-long careers that were once the hallmark of this industry.  He has a playbook, a team, and the successful track record that can make it so.

Robert W. Mann, Jr.
R.W. Mann & Company, Inc

R.W. Mann and Company provides airline industry analysis and consulting services, working with airlines, employee groups and others.