The Joplin Globe, Joplin, MO

Business

April 30, 2012

Analysis: 6 possible outcomes from US Airways-American merger

CHARLOTTE, N.C. — With American Airlines in bankruptcy and US Airways very publicly circling its parent company, AMR Corp., the U.S. could soon have just four mega-airlines. That could raise fares and reduce service, but perhaps bring some stability to a turbulent industry.

Tempe, Ariz.-based US Airways Group Inc. has reached agreements with American’s three largest unions on what post-merger contracts would look like, and is trying to win the support of the rest of American’s creditors. American is fighting off the attempt, and says it’s committed to emerging from bankruptcy protection as an independent company.

And while a merger is far from certain — US Airways hasn’t submitted a formal bid, and any plan would have to be approved by the bankruptcy court, creditors and American’s board of directors — some analysts have said it is the most likely outcome to American’s bankruptcy.

The newly created company, which would be called American Airlines and based in Fort Worth, Texas, would be the largest airline in the U.S. So what does that mean for fliers? Here are six possibilities:

1. Higher fares: Having fewer airlines allows carriers to charge higher prices, especially on popular routes that both merging carriers fly. “When you only have one carrier on a route, you’re likely to have reduced competition and higher fares,” said Joshua Schank, president of the Washington, D.C.-based Eno Center for Transportation.

But with fuel prices climbing relentlessly and airlines skating by on razor-thin profit margins or losing money, Schank said fares will likely keep rising, merger or not — or we’ll see more bankruptcies. “You can’t win,” he said.

2. Crowded planes: Fewer airlines will likely mean fewer seats for sale. “Load factors,” or the percentage of seats filled on each plane, have been hitting record highs month after month. As demand keeps going up, airlines have been more disciplined about keeping the supply of seats down.

For example, US Airways has reduced its total capacity about 8 percent since 2005. The industry as a whole is down about 1 percent. In the first quarter this year, US Airways’ average load factor was 79.3 percent, a record high and up from 78 percent. Every unsold seat represents a loss for airlines, so it’s to their advantage to pack planes as tightly as they can.

That means that on busy routes, empty middle seats are likely to remain a distant memory.

3. Better frequent flier perks: “Merging airlines are very careful not to mess with their rewards programs, because they don’t want to antagonize their most loyal customers,” said Rick Seaney, an airline analyst and CEO of FareCompare.com. “Merged airlines sometimes give passengers more destination opportunities,” he said.

For example, Southwest and AirTran still have separate rewards programs, but since their merger, frequent fliers can transfer rewards between them, allowing a much wider range of destinations.

One potential glitch: US Airways and American Airlines are part of different flying alliances, Star Alliance and Oneworld, and the merged airline would have to choose one. That could limit the number of partner airlines for which frequent fliers could redeem miles.

4. Reduced service to some markets: Smaller markets likely will bear the brunt of fewer flights. “Smaller cities are the ones that typically feel the most pain from mergers, since they can lose flights or get dropped altogether,” Seaney said. Schank said markets most likely to lose some service are those that are already served by US Airways and American through different hubs.

“If they’re currently served by American through Dallas and US Airways through Charlotte, you could just serve them through Charlotte,” he said. Memphis, Savannah and Richmond are examples of smaller markets that have direct flights from both carriers from Charlotte and Dallas. The rationale is the same as that behind reduced capacity: Two partially full planes cost more to fly and generate less revenue than one full flight.

5. Charlotte likely still major hub: US Airways CEO Doug Parker has said that a merged US Airways-American Airlines would keep both companies’ current hubs. Charlotte Douglas International Airport is US Airways’ busiest hub, with 630 daily flights — about 90 percent of the airport’s total — operated by US Airways. The airport has embarked on a $1 billion expansion plan, funded mainly by revenue bonds paid for with proceeds from the fees airlines pay to use the airport.

Analysts say Charlotte Douglas could fill a hole in American’s route map, which lacks a major East Coast connecting point. “Charlotte is in a position where I don’t think you’re in danger,” said Schank.

6. Maybe a bit of stability: The airline industry is one of the most volatile around. Since 2001, United, Northwest, Delta and US Airways have gone bankrupt (US Airways twice), along with a host of smaller carriers. Mergers have included United-Continental, Delta-Northwest, US Airways-America West and Southwest-AirTran. The result has been a whipsaw of change, job cuts, lost wages and benefits for workers, and a dizzying new array of added fees and service changes for fliers.

“Consumers basically have a choice,” said Schank. “Do you want a stable industry with higher fares or an unstable industry with lower fares?”

 

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