US Airways – Paul J. Siegenthaler

Consumers’ interests acknowledged

For almost a year, ever since announcing their intention to merge and become the world’s largest airline (admittedly they never promised to become the best), United Airlines and US Airways have behaved as though this was a fait accompli. But the Justice Department saw things another way, forcing the two airlines to abandon their dream.

I shall remember for a long time the frustration I felt on June 11^th in Washington DC’s Dulles Airport when, arriving from London on a delayed United Airlines flight, a number of stranded passengers were waiting in line with me, surrounded by banners hailing the advent of the world’s largest airlines, when late at night United Airlines only had one single person at ground staff to attempt to rebook those passengers that had missed their connections and who, like me, were offered no alternative other than to sleep on the airport’s benches.

United Airlines could not, for whatever reason, re-book me on an early flight on the next morning on US Airways, their future merger partner, and sent me to the other end of the terminal to negotiate a flight ticket there, but there was nobody at their desk.

Shaking hands over a deal that shall not be

And so maybe it is time to hold airlines to account and request that the service they provide to their customers resembles in some way the claims made in their advertising campaigns. Clearly, the pressure on airlines to contain their costs is harsh, but reducing the competition between airlines on key routes would allow service levels to drop to unacceptable levels. It was bad enough on the return transatlantic flight (delayed by four hours) to have to wait 50 minutes after take-off in business class before even being offered a beverage (most passengers including myself had fallen asleep well before any dinner was served). The very kind and apologetic flight attendant was apologizing for the fact that there were only two of them to attend to a full business flight cabin…

Lack of competition in the airline industry can already be felt within some of the alliances, and the impact on fares for routes that are operated by several operators all belonging to one same alliance is already clear to see. Merging companies would only reinforce what is already an oligarchy when it comes to setting air fares.

The only measure that can effectively counteract a continuing fall in customer service standards is to maintain a healthy level of competition. A big thank you to the Justice Department for having understood this and threatened legal action against United and US Airlines if they went ahead with their merger plan, in order to preserve what they called true market-driven competition.

Greater clarity regarding the merging of major airline operators

United and US-Airways, now turning their back on each other

For many years, there was clear opposition against the merging of major airlines, but by 2006 it became clear that something had to change in the airline industry after some of the major players had collapsed. This prompted the authorities and justice experimented a little in that field, allowing Continental to merge with United, Northwest to joint Delta, and US Airways to merge with American West. But now, two of the above mentioned airlines turn up again for a second round of mergers and this has clearly prompted new thinking. Breaking away from a trend which had been taken for granted, the Justice Department is now saying “enough is enough”.

Back to the drawing board

United Airlines have lost almost $ 1 billion since the merger deal was proposed last year. US Airways is seeking ways to remain competitive in an increasingly competitive industry. Further mergers between any of the top-top players are unlikely to be given the green light in the foreseeable future; so this means that the further consolidation of the industry will need to focus on sweeping up some of the small or medium sized players, and this is clearly the focus US Airways will be taking.

Loss-making United Airlines had probably best concentrate on fixing it’s own structure, costs and offering rather than add a further layer of complexity to the business by grafting on some other airlines onto its already ineffective business. With little left to save on costs, it is surprising that no major airline in the United States has attempted to differentiate itself on service. From my recent experiences with United Airlines, it would not take much to make flying with them a more pleasant experience than it is at the moment. Probably not very costly to implement, and with a guaranteed noticeable impact for their customers. This could be a good place to start.

Airline Industry Consolidation Will Continue – Whether Governments and Regulators Like It or Not

Attempting a second policy U-turn in less than a decade – have we gone full circle?

In the country which was the first to liberalise its airline industry some 30 years ago, the U.S. Department of Justice marked this month what could be a 180° change in policy by challenging the proposed merger of US Airways and its ailing rival American Airlines. If this is really a U-turn, it only sets us back to the situation that prevailed at the end of the 20^th century when the proposed acquisition of US Airways by United Airlines was fiercely opposed.

The first U-turn actually occurred in 2006, after years of systematically opposing airline mergers, when the regulators allowed Continental to merge with United Airlines, Northwest to join forces with Delta Airlines, and US Airways to merge with American West, to name just the most important transactions that gradually crystallized the consolidation of the airline industry in North America and inspired European airlines to attempt the same.

Disruption : The emergence of a new business model

Until the 1970s, air travel was smart, prestigious, expensive and regarded as a privilege enjoyed by the appropriately named “jet set”. But things were about to change. The liberalisation allowed new players to emerge with a very different business model, cutting the frills that provided passengers with no real additional value, such as glitzy sales offices on Park Avenue, London’s Regent Street or the Champs-Elysées. Low-cost airlines were born, flying their aircraft at close to full capacity and making air travel affordable rather than exclusive.

Next came the smarter strategy of variable pricing, adjusting the offering to the demand at a micro-level and thereby yielding a far better income by selling last available seats at a far higher cost than the first cheap ones on any flight. At first the major established airlines looked down upon those “cheap” nasty would-be competitors and attempted to resist the trend towards flexible pricing. Today, flexible pricing is the norm in air travel, even for business or first class seats. The rest is history.

It only took ten years after deregulation for the airline industry in the USA to become chronically loss-making, as most efforts to adapt to the new market reality were unfortunately off-set by various political crises and downturns in the world economy. Some of us may still have fond memories of Pan-Am, TWA and Eastern Airlines – absolute monoliths in their own time, but all three are gone now, having vanished faster than the dinosaurs did when our planet was hit by a giant meteorite.

The Regulators’ schizophrenic reaction

Faced with the emergence of these new lean competitors, established airlines had two choices : emulate these new players through ruthless cost cutting and the removal of all “frills” in the service provided to customers – which could end up damaging the company’s brand image and is difficult to implement in a highly unionized environment – or aim for a quantum leap in scale to share the cost of the infrastructure required to run a full service airline, by acquiring or merging with other airlines.

The regulators’ first reaction was to oppose all industry consolidation attempts, feeling that these would reduce the number of direct flight routes which consumers enjoy, thereby forcing them to transit though hubs, and that the cost of air travel would rise sharply as soon as the competitive pressure is alleviated.

It took the financial collapse of some of the major airlines for the regulators to realize that full service airlines had no choice other than to transform their cost structure. This prompted the first U-turn, in 2006, which opened the door to frantic M&A activity in the airline industry in North America as well as on the other side of the Atlantic, with Air France and KLM joining forces, British Airways swallowing up British Midland in spite of Virgin Airlines’ vehement protest, and the IAG group declaring its intention to make a series of significant further acquisitions once the British Airways and Iberia merger has been fully digested.

Panic reaction – or strategic U-Turn ?

A merger between US Airways and American Airlines would create the world’s largest airline, and one can understand why the US Department of Justice filed a civil suit against that merger on 13^th August. Nevertheless, American Airlines has been under Chapter 11 bankruptcy protection ever since November 2011, so either some form of merger will take place as US Airways and American Airlines have vowed to defend their case, or American Airlines will be torn apart and absorbed in bite-size chunks by the rest of the industry.

Either way, this will represent a significant step towards the consolidation of the airline industry.

The recent reaction of the U.S. Department of Justice was probably more of a knee-jerk than the manifestation of a strategic re-think which would mark a real U-Turn. That Department, together with six state attorneys general, and the District of Columbia, may just have voiced the politically correct antitrust concerns which a merger of this magnitude deserves …

IAG will be observing the situation with interest. If the US Airways – American Airlines merger goes ahead, nobody will be able to oppose the series of acquisitions AIG envisage carrying out in the years to come. And if American Airlines are left to disintegrate, there will be interesting pieces for IAG to choose from.

Let’s watch this space. In the meantime, sit back, relax and enjoy your flight !

Tag Archives: US Airways

Wings clipped for the United Airlines – US Airways Merger