December 4, 2020

Airline oligopoly advances as American and US Airways announce merger

Fasten your seat belts, the ride for airline passengers is going to get if not bumpier, more expensive. Completing this stage of the consolidation of the legacy airline sector, American Airlines, currently in bankruptcy, will merge with US Airways. In a short period of time, United has merged with Continental, Delta with Northwest, and now we have three giants, each aligned with one of the three global “alliances” that seek to consolidate and tame the world’s air transportation markets. (A fourth big player in the domestic airline industry, Southwest Airlines, remains unaffiliated with a global alliance, and employs a slightly different business strategy.)

One of the principal drivers of this consolidation is the corporate travel market. They want to be able to supply a comprehensive network, and grab all of the business travel a major player buys in a year. Atlanta or Anchorage or Almaty or Accra, just call us. We’ll get you there (via our hubs and partners, if necessary), throw in upgrades for your people, and give you a little less than rack rates. But no worrying about advance purchase, change of itinerary, or any of the annoyances that plague the price-sensitive flyers.

Airlines love to sign contracts with the organizations that buy in bulk because it nails down revenue, and they run a very high fixed cost business. And the really big buyers of air travel are global.

Here is the competitive alignment almost certain to result:

United will be the domestic arms of the global Star Alliance, notably including Lufthansa, Japan’s ANA, Korea’s Asiana and Singapore, but also a variety of lesser carriers from the fairly big ones such as South Africa Airways and Swiss (itself controlled by Lufthansa), down to Croatia Airlines. 28 of them in all.

Delta will be Skyteam’s representative in the United States, entwined in the embrace of Air France-KLM (two airlines, one company), Korean Air, Aeroflot, and three Chinese carriers – 2 from the mainland and one from Taiwan, 19 in all.

And the new consolidated American will be One World’s operation in the United States, in partnership with British Airways, Japan Airlines, and Qantas, 12 in all. American and British Airways already have the coveted ability to operate between New York and London (the most lucrative airline route in the world) as a joint venture, offering an unrivaled range of departures, very appealing to executives who want to wrap up their meetings in one city, get to the airport and get a business or first class seat on the next flight out without having to wait very long in the special lounge.

US Airways is currently a member of the Star Alliance, but it can be expected to exit, so that the combined carrier will reinforce One World’s presence. Continental, after all, extracted itself from Skyteam and joined Star before its merger with United. US, it should be noted, was itself the product of a merger engulfing the late, lamented Piedmont (the best domestic airline product I ever flew – Piedmont was my airline of choice in its heyday), Allegheny (widely derided as Agony Airlines), and America West (itself a merger product).

The current merger is expected to be closed by the third quarter of this year, but don’t expect the two operations to change quickly. Airline mergers, with their separate labor practices, fleets, and staffs are notoriously tricky to integrate, so the two networks initially will operate separately, and step by step start reassigning aircraft (better matching size to market), repainting planes, consolidating staff, and harmonizing practices and procedures.

CBS Moneywatch summarizes the terms of the deal:

AMR creditors will own 72 percent of the new company, with the remaining 28 percent will going to US Airways shareholders. The creditors’ portion includes a 23.6 percent share for American employees and unions, plus a small stake for existing shareholders of American’s parent AMR Corp.

Note that the shareholders of AMR take a hosing, but hey, that’s what bankruptcy means. The employees are getting a bigger slug of equity to compensate them for all the take-backs they suffered when bankruptcy voided their contracts. Unlike shareholders, the good will of employees is essential to the success of the venture in the future. Cost savings are estimated to be rather modest, according to the companies, roughly $ 150 million a year.

But there will be extra expenses in the short run:

They also said they expect to spend $ 1.2 billion on transition costs over the next three years.

Meanwhile, 37 percent of the domestic airline market is in the hands of discount carriers, with Southwest accounting for the lion’s share, but a variety of niche carriers such as Frontier, Allegiant, and Alaska also nimbly exploiting niches overlooked by the oligopoly outfits. This is where the primary price competition will come from, but consolidation is always a factor in an industry where the risks are high, vulnerable as airlines are to fuel prices and the performance of the economy.

On the international front, three aggressively expanding Gulf carriers – Emirates, Qatar, and Ethihad – are grabbing market share from the alliance carriers, using their location at the geographic middle of the Eastern Hemisphere land mass to funnel traffic among the continents. Full consolidation of the global air travel market is not yet with us, but it has taken a step forward today.

American Thinker