This is an important milestone for US which is now one step closer to long-expected merger with AA. US is confident that its merger proposal will yield better results than AA's plan of remaining a stand-alone airline, while their promise of less job cuts and better wages in case of merger is music to the ears of AA's employees. However, the airline understands that the merger is far from a done deal, with many potential hurdles still waiting to be solved.
The benefits of AA-US merger might be very tempting for all, with a possible exception of AA management and passengers. The merger would create an airline the size of United and Delta in virtually all aspects, while both carriers would likely have something they wanted for long - profitability at AA and size at US. Naturally, the merger also carries a number of burning questions.
First things first; we can start with brand and headquarters. US confirmed that the merged company would retain both AA's brand name and its headquarters in Dallas-Fort Worth. The choice of brand is quite logical since AA has a better brand awareness and is largely considered to offer better service than US. AA's brand image is scheduled for change anyway, but to what extent, if any, this would be influenced by US merger is unknown.
But one of the more controversial question surrounding the potential merger is the question regarding hub divestitures. While US' CEO Doug Parker claims that no divestitures would be required, some analysts, employees and the general public fear the merger could bring just that. Albeit previous mergers in the United States led to some of the hubs being closed or severely down-sized, with the primary reason for this being close proximity and similar market of two hubs, this scenario is truly unlikely in case of AA-US merger.
American Airlines has five hubs: Chicago O'Hare (ORD), Dallas-Fort Worth (DFW), Los Angeles (LAX), Miami (MIA) and New York JFK (JFK). AA is the largest carrier at its headquarters in DFW as well as in MIA. On the other hand, there is still room for improvement in ORD, while the carrier has low market share in LAX and JFK. LAX might actually not be that much of a problem, since none of the top thee carriers in LAX have a large market share - they all account for only around 16% each and AA is the smallest among them. This on itself is really not that bad. In New York, however, the carrier is seriously lagging behind United, Delta and jetBlue.
US would bring three of its hubs to the table; Charlotte (CLT), Philadelphia (PHL) and Phoenix (PHX), all of which see US as the largest carrier. However, the introduction of CLT and PHL also brings overlap with two of AA's hubs, while the future is uncertain for PHX:
- CLT - MIA overlap
CLT and MIA serve similar purpose for both US and AA respectively as both carriers primarily use the two hubs for their services to South America, the Caribbeans and Europe. However, closing either of them would be unnecessary. Due to its large Origin and Destination (O&D) traffic which brings higher yields than connecting traffic, closing MIA would never make sense. Furthermore, being further south than CLT, MIA would likely take over most of CLT's current routes to South America. On the Caribbean services, however, this would likely occur to a lesser extent, while European services could easily be divided between MIA and CLT, or shifted entirely to either hub. CLT has more potential as a hub for domestic connections and AA-US would likely use it to challenge Delta's hub at Atlanta.
- PHL - JFK overlap
Similarly to CLT and MIA, PHL and JFK also overlap on international services, while their close proximity is not helping either. However, AA is a distant fourth largest carrier in JFK and due to the unavailability of slots, having a large presence in New York is a distant dream for AA. PHL will be able to cover that market to some extent, while already #1 position of US at the airport is a serious benefit. PHL will likely remain a valuable hub for domestic and international connections, but higher premium, O&D traffic and a number of oneworld alliance partners serving JFK will be a great reason for AA to stay in New York as well.
- PHX question
The future of PHX is probably the most uncertain of all the hubs of merged AA-US. The hub is loceted between LAX and DFW, and its close distance from LAX might be the best argument for survival of PHX. The airport could be a great way to connect smaller West Coast communities avoiding the congested LAX and, to some cities due to its location, less convenient DFW. It could also serve its purpose by taking over some of the connecting traffic from LAX.
Since AA and US are part of different airline alliances, oneworld and Star Alliance respectively, they would have to make a decision on which alliance to join. There has been little doubt that oneworld is the alliance of choice and it is likely that even if the two carriers would want to enter Star Alliance, the move would be blocked by regulatory bodies because of United's membership in Star Alliance. AA is one of the key airlines in oneworld, has exceptional collaboration in place with oneworld partners, especially over the Atlantic, and the carrier's emphasis on South America also fits oneworld strategy perfectly. US, on the other hand, is not nearly as important to Star Alliance thanks to United's membership.
But what might concern the traveling public the most are the fears of possible fare hikes. These fears might unfortunately turn out to be founded. With one major airline airline less in the market, fares could indeed increase on some routes, although the impact is hard to predict. It will benefit the carriers, but certainly not the passengers.
AA presented its latest post-bankruptcy business plan with management still against the merger. Among other things, the plan is for AA to continue relaying on its partners for both international as well as domestic flying. It also emphasizes the need for lower labor costs without which the carrier would have insufficient liquidity and financial stability. A significant capital investment would also be needed to sustain the plan.
Although US managed to persuade AA's unions that merger would benefit them, the unions represent only three of nine members in AA's unsecured creditors committee. The other six members are Wilmington Trust, Bank of New York Mellon Corporation, Pension Benefit Guaranty Corporation, Boeing and Hewlett-Packard and it is questionable if the merger would benefit all of them. But naturally, creditors will vote on what is in their best interest. If what US can offer to reluctant creditors is greater than the benefits of keeping AA as a stand-alone, the creditors will play along.
While US' CEO Doug Parker is now turning to other creditors and analysts and is doing his best in explaining how US' plan for AA is much better than AA's own, AA's management remains reluctant to the merger fearing that their positions are at stake. AA's unions, on the other hand, would love to see their management replaced. It will certainly be interesting to watch how this will play out.