The new American Airlines: Winners and Losers

by Ned Levi on December 2, 2013

Photo by Simon Clancy, http://www.flickr.com/photos/39551170@N02/

When Bankruptcy Court Judge Sean Lane said of the US Department of Justice settlement with US Airways and American Airlines, concerning their proposed merger, “The settlement easily satisfies” the bankruptcy requirements for American Airlines, and that the group that sued to block the deal “utterly failed” to prove the merger would harm them, the last hurdle the two airlines had to pass was removed.

US Airways and American Airlines will merge on December 9th, with the combined company called American Airlines Group Inc., flying under the banner American Airlines. Doug Parker, head of US Airways, will assume that role for the new American Airlines.

There’s been much discussion of who will benefit, and who will be hurt by the merger of these two airlines into the largest airline in the world. Here’s my take.

The biggest merger winner is the new American Airlines. The final merger plan barely differs from the original plan. While the airline must divest itself of slots at both Reagan Washington National (DCA) and LaGuardia (LGA) airports, and sell gates at a number of airports, they represent just 0.25 percent of the merged American’s capacity.

The gate divestitures, hub and service commitments required by the settlement would all likely have been done by the new American anyway. The hub commitment, for example, lasts only three years, about the time the airline would take for a full evaluation.

The biggest merger loser is the US Department of Justice (DOJ). Whether or not the DOJ was correct that the merger would be bad for the American traveling public, the actual case they brought was weak, in my opinion. The DOJ suit had problems in part because it argued there would be an adverse impact of increased concentration at DCA, reaching 49 percent, while in the past they had explicitly approved Delta at LaGuardia, and United at Newark, both slot controlled airports like DCA, to have a concentration in excess of 49 percent.

Other arguments which weakened their case was their argument about capacity levels and growth plans, and “Advantage Fares.” Since airline deregulation, the Federal government abrogated its ability to control those levels. With regard to “Advantage Fares,” the DOJ evidence was not particularly convincing and undercut by the numbers, in that only about 0.6 percent of the total US air travel market would be affected.

Had the DOJ case been stronger, the settlement would have been stronger.

As explained in my column, What is the future of the new American Airline’s hubs, Philadelphia (PHL) may end up being a winner, with more international flights. Phoenix, on the other hand, may be a loser, becoming downsized once the three-year moratorium on hub maintenance is ended.

Business travelers will be winners with new American. American’s coverage on the East Coast was weak outside of New York, and it didn’t have great coverage in Europe. US Airways didn’t have strong service in the Midwest or Asia. Combined, their coverage melds nicely for business travelers who worry more about schedules and network coverage than price.

Leisure travelers may be in part losers, as with reduced capacity along some routes, fares will likely increase. Some small cities in particular may eventually lose coverage with the loss of the new American’s lower concentration at DCA.

American’s frequent fliers are domestic winners. American’s only domestic partner is Alaska Airlines. Now, combined with US Airways routes, American’s domestic coverage, especially in the East, is substantially improved to earn and redeem miles.

US Airways fliers are domestic winners in that they will be flying in some newer planes soon. Doug Parker has stated the new American will focus on a better inflight product.

How American and US Airways elite frequent fliers will do is “up in the air” right now. What happens could go either way. Will American’s eight annual system-wide upgrades for top elites continue, or will it be reduced to US Airways’ two upgrades. US Airways has more elite levels which can be beneficial for some. How the new American’s frequent flier program is structured could have a major impact on mid-tier elites.

US Airways offers unlimited complimentary upgrades to First Class on domestic, Central American and Caribbean flights, but that’s only an option for American’s Executive Platinums. We don’t yet know how this will play out.

US Airways award fliers will be big losers with the loss of the Star Alliance and move to OneWorld. Star Alliance had 27 other carriers including ANA, Singapore, EVA, Lufthansa, and South African. OneWorld has far fewer members, and together they have a much smaller network.

US Airways and United frequent fliers living/working in the area between Philadelphia and northern New Jersey are losers in so far as they had the choice of flying from Newark and taking United, or Philadelphia and using US Airways, to rack up frequent flier miles in their more frequently flown airline. That choice will be eliminated as the new American will no longer be in the same alliance, Star Alliance, as United. This choice will certainly affect me.

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