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Don’t Listen to Those Articles: Airline Mergers Don’t Succeed or Fail Because of Aircraft or Route Maps

There’s a back-and-forth worth reading between Gary and Cranky (here) about the relative merits (or in Gary’s view – from the wing obviously – non merits) of a US Airways merger or purchase of American Airlines. In short, Gary thinks it makes no sense because of the union issues, non-overlapping route map, and airline mergers generally stink. Cranky is on the side that US Airways’ management team is the only group that can make American successful.

I side completely with Cranky on this. Why?

Articles that are written immediately after an airline merger always focus on whether the airlines’ route maps overlap; whether they fly the same aircraft; and, buried up paragraph number 11, issues with unions.

Let me throw this out there: airline mergers do not succeed or fail based on route maps or aircraft. An unsalvageable hub (TWA in St. Louis) is different than having route maps that may or may not seem compatible. Overlapping route maps can be a good thing: slots (especially at LGA or DCA) can be valuable whether they’re kept or sold; if routes overlap then eliminating one competitor can help drive prices up. In other industries, buying out a competitor in the same market is often considered a good move. I don’t know why with airlines it’s considered a negative.

We often hear about a merger being a good or bad idea because aircraft are the same or different. While it’s better to have fewer aircraft types than more aircraft types, it’s not necessarily a bad thing to introduce new planes into the mix. In fact, it may allow the combined carrier to eliminate less efficient aircraft from their current system. Or it may introduce a better premium product that they don’t currently offer. Yes, there is cost associated, but it’s hardly a dealbreaker.

Let’s take a look at the mergers from the past 20 or so years:

- Alaska acquired Horizon in 1986 and is still run as a separate business (as least for now). Alaska has long been a well-run airline and the merger of the two companies made sense, helping Alaska serve smaller cities in the northwest. I believe there is no aircraft overlap.

- AirTran bought ValuJet, which helped flesh out their presence in the southeast. AirTran was a well-run airline up until it was acquired by Southwest. Southwest’s purchase of AirTran will likely end up being a good move, despite the addition of new aircraft types, because Southwest has a great management team that understands labor and thought AirTran could help it build out an international presence and a stronghold in Atlanta.

- America West bought US Airways, which has been a pretty successful merger despite some labor hiccups. They continue to work those out, but even though the two airlines flew a wide array of aircraft on routes that were completely unrelated, the combination has worked, allowing US Airways to build a reasonable national presence. That merger has been successful despite the aircraft issue, almost despite the labor issue, and without an obviously complementary route structure. Why? Because those guys from America West really know how to run an airline. They’ve been extremely smart about pricing and although people complain about in-flight product, they have not invested money where it does not get paid back. It’s easy to be a follower in the airline world; it’s much more difficult to choose not to do what everyone else is doing because you think it makes more sense.

- American bought Reno Air, which was a ridiculous move from the start. Despite the fact that there were no labor issues, that they both flew MD-80s, and that Reno Air helped flesh out AA’s west coast strategy, it was a disaster. Once people stopped flying after 9/11, AA essentially shut down everything that was associated with Reno Air, from eliminating the San Jose hub to grounding Reno Air’s planes. On paper, the merger had everything. In reality, once the red-hot Silicon Valley economy slowed down, there was no reason for Reno Air to exist.

- American bought TWA. By the time American bought it, TWA was a shell of its former self. They were basically getting the St. Louis hub, which was pitched as a way to reduce congestion in Dallas and Chicago. That really made no sense (it was a connection point for smaller cities that were already connecting in Chicago, rather than an origin/destination location), and they dismantled that hub soon after the merger. That purchase didn’t fail because of overlapping route maps or aircraft, it failed because it didn’t reduce competition, lower costs, or gain new markets.

- Delta bought Pan Am’s European routes. Not a merger (well, it was going to be a merger, but Delta pretty much screwed Pan Am over at the last minute and just kept the European routes), but a purchase of assets. They also got the shuttle from Pan Am in that move. Although they don’t run Pan Am’s Frankfurt hub anymore, Delta’s strong European presence dates back to this; and they’re still flying the shuttle.

- Delta bought Northwest. People (me included) pooh-poohed this when it was announced because of the high concentration of hubs (Minneapolis, mini-hub in Chicago, Detroit, Cincinnati, mini-hub in Indianapolis, Memphis) and the non-overlapping aircraft. But they were able to right-size those hubs, shrinking Memphis and Cincinnati (though keeping fares high on remaining flights) and Delta gained a huge piece of the puzzle with Northwest’s Asian route structure. In hindsight, that merger was probably worth it for the Asian routes alone. Delta’s management was smart and deliberate about the merger, and it succeeded because they made smart business decisions quickly, reducing routes where it made sense.

- Song wasn’t really a merger, but I thought I’d point it out here because Delta’s strong in-flight entertainment options were borne out of Song.

- United/Continental. It’s early, but this looks like a success because the management team is strong, and both airlines were in a place of strength when the merger was announced (Continental stronger than United, but United was turning itself around at the time). This was a case where the route maps were complementary, and that certainly helped, but it could just as easily have been a disaster if the management teams weren’t so good.

So, what does this all mean for US Airways and American? Basically, I don’t care so much about the aircraft. The route maps aren’t particularly complementary, but US Airways would gain a great Latin American network. It remains to be seen how JAL/British Airways/Iberia plays out, but if it lives up to its promises, those deep integrations will give them an integrated presence in Europe and Asia. The US management team has shown in Vegas and Pittsburgh that they have no problem dismantling sacred cow hubs for the good of the company. I could imagine them shrinking operations in LA and San Juan. Perhaps they shrink Charlotte and focus on Miami and Philadelphia. Perhaps they have Phoenix, Dallas, Chicago, Miami and Philly. Eh, maybe 1 less. But you get the point – they’ll have a pretty strong national presence (minus the Northwest, which they cover with their codeshare with Alaska). Lower the costs, rationalize domestic routes, grow Latin America, improve the BA/JAL/IB situation, raise fares because of the reduced service in the market. It could work.

I don’t know much about the union situation, so I won’t say much about it here other than the US management team has probably learned a ton from the America West merger, and that US Airways’ low-ish paid pilots would probably be happy if their pay scales moved a bit toward the scales paid at American.

Airline mergers aren’t empirically bad ideas. Remember – US airlines were terribly run for quite a long time. The old model of high costs matched with ridiculous fares and network strategies borne out of hubris was ripe for disaster — no merger could salvage that. But the airline mergers that have risen from bankruptcies ashes – Delta/NW, UA/CO, US/HP – have actually been quite strong. I think it’s pretty clear we’ll see the fine folks in Phoenix pursue AA sooner rather than later.

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  1. Good article. The recap of historical mergers is informative.

  2. Bingo. Good management trumps everything when it comes to airline success. America West had pretty much nothing going for it when Parker took over — second fiddle to Southwest in leisure markets! — and yet they’ve managed to make money and become an important player in the airline world.

    Taking control of American would finally put “good assets” in Parker’s hands. I’m sure he’ll be extremely successful with them if he can get the right deal done.

  3. I thought it was ValuJet that effectively bought Airtran to get rid of its name and history.

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