American Airlines/US Airways merger cleared hurdles: Will fares increase?

Courtesy Bloomberg

Courtesy Bloomberg

American Airlines expects to formalize its merger with US Airways by 9 December now that it has cleared the legal anti-competition hurdles by giving up slots at several airports including Reagan National Airport in Washington DC and LaGuardia Airport in New York City. Low-cost carriers like JetBlue and Southwest will vie for these slots.

The AA/US Airways merger is the third and last of the mega mergers after United Airlines/Continental and Delta/Northwest, making it the world’s biggest airline.

Size matters. The crux of the case seemed to have hinged on the survival of AA that would otherwise go under, and this in itself might be worse for consumers. AA declared bankruptcy in November 2011. The task then was to ameliorate consumers’ post-merger concerns about the ability of not only AA/US Airways but also other strengthened collaborative entities to muscle in on higher airfares since logically, where once there were six big competing carriers and now only three, the competition has been reduced by half. The corollary is the reduction of choices for consumers through consolidation which can by the first economic principle of supply and demand mean the propensity for prices to rise rather than fall.

With more slots allotted to low-cost carriers, it would suggest renewed faith in the battle between David and Goliath. Not to be disparaged, the threat by these carriers to legacy airlines have brought about new angst among the latter, many of whom by their very size are saddled with inflated costs, low productivity and union problems. The game gets amplified. At the same time, the giants may become more aggressive in their own turf. Yet history has also shown that whatever the number of airlines – so long as there is competition and in spite of that – the nature of the industry is such that all it needs is for one bold airline to initiate a price increase or additional surcharges, others naturally follow suit. Ordinarily, you would say with resignation, c’est la vie.

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What some airlines say about themselves

United Airlines used to “fly the friendly skies”, which have proven to be far from being so for competing airlines as more of them spread their wings. The sky may not be the limit after all. In 2010, United merged with Continental Airlines which has promised its customers: “We really move our tail for you.” Well, it’d better be, as no airline can afford to sit idle on the tarmac. The partnership realized a dream of United to “fly united”, professed through the depiction of two mating geese in the air.

BA to fly to serve
British Airways (BA) prides itself as “the world’s favourite airline”. But is it really, even when no one bothers to challenge the claim? Little wonder that Iberia Airlines, which has merged with BA, claims it is “one of the world’s best airlines”. There is no jostling with the dominant partner. The UK carrier says it swears by four words which have “always been at the heart of everything we do”: To Fly. To Serve. Isn’t that what is expected, you may ask. Trust the Brits to go nano on the language they own and to assume that foreigners do not quite understand the finer or deeper meaning of words as simple as “fly” and ”serve”. BA explains: “It’s what we do. It’s who we are.” Apparently those four words were painted on the tailfins of early aircraft and the pilots still wear them in the lining of their jackets and on the peaks of their hats. Do they even need to be reminded of their jobs? BA has said that will never change. It is after all British tradition.

qantas2
It is distant cousin Qantas that puts it better: “You’re the reason we fly”. It goes on to say: “While you might fly for many different reasons, we fly for one. You’re the reason we fly.” The attention shifts from the flyer of the airplane to the rider in the plane, and from the server to the person who is being served. Qantas clearly demonstrates a better understanding of marketing principles.

But Cathay Pacific Airways decided it might rephrase BA’s pride in reaching out to its customers when it rolled out a series of ads in 2011 under the banner: “People. They make an airline.” The campaign intended to showcase a team that would go the extra mile to assist someone, who, by implication, could be a customer. But when a scandal involving flying crew on board an aircraft began circulating on the internet, it had to curb its enthusiasm in extolling its staff.

Courtesy Singapore Airlines

Courtesy Singapore Airlines


Does the crew make it a great way to fly? Yes, very much so. Yet no one makes a better case of the ambiguity than Singapore Airlines (SIA) whose tagline – “Singapore Girl, You’re a great way to fly” – has become a self-fulfilling prophecy of sorts. The sarong-clad stewardess has become synonymous with the airline and everything that it represents; its name might well be Singapore Girl. Feminist activists have derided it as being sexist, but it has done the airline wonders. However, the Singapore flag carrier’s latest ad campaign, which draws on the theme of “the lengths we go to” to demonstrate its commitment to the customer, pales by comparison to the early poetic catch phrases such as “You’re as young as you feel” and “It’s the journey, not the destination”. While SIA insists that the Singapore Girl remains the protagonist in its latest ads, sometimes you wonder if you need to go to that length to drive home the point. When the Singapore Girl smiles, enough is said.

Lufthansa tries to go one-up. It says, “There’s no better way to fly.” But don’t we want to know why, if not how? But listen to American Airlines: “We know why you fly. We’re American Airlines.” That sounds a bit too arrogant, doesn’t it? In the same vein, the Northwest Airlines tagline: “Northwest Airlines. Some people just know how to fly.” Maybe it is an American thing; modesty has no place on the world stage. Yet Delta Air Lines simply promises: “Delta gets you there.” We certainly hope so, as says Air New Zealand: “Being there is everything.” Southwest Airlines wants to be known as “a symbol of freedom”, whatever that means – another American thing?

By comparison, European airlines are more down to earth. Austrian Airlines is “the most friendly (sic) airline” and Virgin Atlantic “no ordinary airline.” Or, they are simply factual. Alitalia is “the wings of Italy” the way that EVA Air in Asia is “the wings of Taiwan” but not quite what Cathay Pacific claims to be “the heart of Asia.” Cut the French some slack about “making the sky the best place on Earth.” They have the airs. But when Swiss becomes “the most refreshing airline in the world”, it suggests a toothpaste-like struggle to impress anew. Sadly, speaking the truth may be detrimental to one’s fate, as when British Caledonian Airlines confessed before it was bought by BA: “We never forget you have a choice.”

Many of the airlines pay big bucks to have those words coined and put into their mouths. Yet does it matter what airlines say or how they say it when the test of the pudding is in the eating? Think it this way – it dresses the pudding to make it look more palatable. In advertising, it is referred to as “recall”. What happens after is reinforcement or disappointment. That is why SIA has for a long time become a great way to fly and BA, whether proven or not, the world’s favourite airline, but Austrian Airlines is forgettable as one of the world’s best airlines, an epithet that is universally applicable to one and many in fluid time. You do wonder though whether for some airlines, considering the cost of their words, what has been said may best be left unsaid.

It’s the age of mega carriers: Will Air France-KLM raise its stake in ailing Alitalia?

Courtesy Wikipedia Commons

Courtesy Wikipedia Commons


Alitalia is fighting bankruptcy as its shareholders initiate efforts to raise funds in light of its main fuel supplier threatening to cut off supply. The Italian postal service will contribute 75m euros (US$101.6m) to the rescue package of 500m euros.

Meantime, Air France-KLM – already the biggest shareholder of the beleaguered airline – waits to see if it should increase, possibly double, its stake of 25 per cent. Air France-KLM chief executive Alexandre de Juniac is in favour of the takeover to gain greater access to the Italian market, but the Franco-Dutch board is cautious about the debt incurred by Alitalia. The Italian flag carrier last made a profit in 2002 and has so far lost 294m euros in the first half of this year. Air France once made a bid in 2008 to take over the airline but was thwarted by a consortium led by then Prime Minister Silvio Berlusconi. The timing today may not be right as the new Air France-KLM is itself struggling with restructuring and cost issues.

The age of the mega carriers has long arrived and it appears the trend, predicted in as early as the ‘80s, looks set to continue. In Europe, besides the Air France-KLM merger, there is the International Airline Group comprising British Airways and Iberia. Lufthansa wholly owns Austrian Airlines and Swiss, and owns 45 per cent of Brussels Airlines, 14.44 per cent of Luxair, and varying interests in a string of other airlines. The competitive field – not only in Europe but also in the United States and to a lesser extent elsewhere – has narrowed to a few mega groups of airlines with fiscal partner interests beyond mere marketing alliances.

In the United States, United Airlines is merged with Continental Airlines under United Continental Holdings; Northwest Airlines is merged with Delta Air Lines; and American Airlines is merged with US Airways. Delta made news when it acquired a 49-per-cent stake in Virgin Atlantic, the stake bought from Singapore Airlines (SIA) which until then had maintained a passive interest in its holding. For Delta, more than for SIA, it would materially increase its presence across the Atlantic.

In South America, LAN Airlines of Chile absorbed TAM Airlines of Brazil to form LATAM.

Somehow the trend is less prominent in Asia and the extended region where flag competing flag carriers generally prefer marketing alliances such as the partnership between Qantas and Emirates, and that between Singapore Airlines (SIA) and Virgin Australia. But it is changing as the competition intensifies in a tight market and as blocs begin to form to make bigger bites, and as countries relax their rules on foreign ownership. SIA now owns 19.9 per cent of Virgin, which is also 19.9 per cent owned by Etihad Airways and 23 per cent owned by Air New Zealand (ANZ). ANZ has announced it will increase its stake to 25.9 per cent, and thus continues to be Virgin’s largest shareholder outside the Virgin Group.

Cash-rich Middle-East carrier Etihad seems to be particularly active on this front, picking up stakes in Air Berlin, Air Seychelles and Aer Lingus, and targeting to complete a 49-per-cent acquisition of Air Serbia in January next year.

Yet the interest seems more as a matter of pure investment or hedging against a shifting competitive landscape. There is no white knight appearing in the horizon to rescue ailing Kingfisher Airlines while many foreign carriers have expressed interest to enter the large and growing Indian market now that India has relaxed its policy on foreign ownership. Etihad is more interested in the less vulnerable Jet Airways. Malaysian budget operator AirAsia and SIA have initiated separate deals with local investors to start new airlines. There is really no valid reason to buy into debts unless the potential for recoup plus growth is visible, almost tangible. But the Indian market has been somewhat of a come-and-go melee, susceptible to changing regulations.

Yet what should make the Alitalia case different for Air France-KLM? It is probably one of market proximity, where the impact may be more immediately felt by the suitors. It goes beyond passive investment – a case in point as mentioned earlier is the SIA/Virgin deal compared with Delta/Virgin deal – to more strategic considerations of how the acquisition would advance the Air France-KLM cause vis-à-vis its competitors within the same region. It becomes an issue of survival in itself.

Interestingly, Etihad was asked if it would be interested to buy into Alitalia, and chief executive James Hogan sidestepped the issue, telling AFP: “At the moment I’m focussed on India, transactions in India. We look at many businesses but we are primarily focused on Jet Airways.” Yet it is rumoured that Hogan has been meeting up with Air France-KLM to discuss the matter, purportedly to persuade Air France-KLM to raise its stake or let someone take its place. Does it appear obvious enough who that “someone” may be? You make a guess.

Boeing blues

Three months after the grounding of the B787-Dreamliner and while Boeing struggles to resolve the issue to get the plane back up in the sky, a new problem has landed on its lap – this time, concerning the B737 jets. The US Federal Aviation Administration has issued an airworthiness directive for more than 1,000 B737 planes operating in its airspace (which also applies in Canada) to be inspected for faulty tail pins that may have prematurely corroded, causing pilots to lose control of the plane.

The FAA said: “We are issuing this AD to prevent premature failure of the attach pins, which could cause reduced structural integrity of the horizontal stabilizer to fuselage attachment, resulting in loss of control of the airplane.”

It is a precautionary move, but likely a costly one for the airlines that have a large number of the B737 jets in their fleet, such as WestJet Airlines of Canada. Since the B737 is a short to medium-range aircraft, it is likely that regional airlines including cargo operators are likely to be the most affected. But safety is not something that you can or want to downplay in the business of flying.

This could not have come at a worse time upon the heel of a Lion Air crash into the waters, short landing at Bali’s Ngurah Rai International Airport in Indonesia just this week. Fortunately all passengers survived. There was no connection between the incident and FAA’s directive – the way that the grounding of the B787-Dreamliner was consequent upon sparks aboard a Japan Airlines plane initially suspected to be caused by the lithium-ion battery pack – and investigators have yet to establish the cause. It might even be extraneous to Boeing. Lion Air, which is Indonesia’s second largest airline and one of the fastest growing in the region, is banned from operating within the US and European Union over safety concerns.

Photo: Reuters/Stringer Indonesia

Photo: Reuters/Stringer Indonesia

But what came across as frightfully familiar was how the fuselage of the Lion Air plane broke apart, recalling similar mishaps experienced by four other airlines that include Continental Airlines in 2008, American Airlines in 2009, Aires Airlines (Colombia) in 2010 and Caribbean Airlines in 2011. Mind you, the B737 has been around since the 1960s and is a favourite plane for regional flights. It is in fact the best selling jet in the history of aviation.

Boeing will have much to do to repair its image. The aircraft business is dominated by two players – Boeing itself and Airbus, and the competition is such that for the bigger jets, the decision to buy which make and model usually comes down to either one of them. Aircraft orders can span several years, and timing is important.

Then, of course, as things settle, there is the looming question of compensation for downtime if Boeing is found to be contributory to its customer airlines losing out on opportunities. At least one airline – Qatar Airways – affected by the grounding of the B787-Dreamliner has publicly announced it will seek compensation from Boeing. Qatar chairman Akbar Al Baker said: “Definitely we will demand compensation. We are not buying airplanes from them to put in a museum.”

American and US Airways merge: Will fares go up?

Getty Images

Getty Images

FINALLY, American Airlines and US Airways have agreed to a marriage that will make it the world’s largest airline, surpassing United which hooked up with Continental, and Delta which merged with Northwest. The new airline will retain the American name but be headed by US Airways chief Doug Parker. The new airline will be headquartered in Dallas-Fort Worth

American which went into bankruptcy more than a year ago had initially resisted the merger while profitable US Airways was keen on the proposal, having been missed in the wave of mergers among compatriot carriers.

So what changes will the US$11bn merger bring?

The rationale for mergers must be more efficient operations, which can be translated into a tighter ship; hence some job redundancies are expected. It can also mean reduced capacity to some destinations, hence more crowded planes and fewer choices for the customer. American and US Airways will consolidate their operations in nine hubs: Dallas-Fort Worth, Miami, Chicago, Los Angeles, New York, Phoenix, Charlotte, Philadelphia and Washington.  The first five are American’s major hubs, and the other four US Airways’ dominant hubs.

Both airlines are expecting savings of more than $1bn a year. Mr Parker said: “The combined airline will have the scale, breadth and capabilities to compete more effectively and profitably in the global marketplace. Our combined network will provide a significantly more attractive offering to customers, ensuring that we are always able to take them where they want to go.”

An interesting development pursuant to the merger will be US Airways’ exit from Star Alliance since American is a partner of OneWorld. As the alliance partnership goes, the transition is not likely to cause any major upsets one way or the other. But with reduced competition, the one question on most customers’ lips is apt to be: Will the fares go up?

No doubt American and US Airways together will be in a stronger position to raise fares, but as a general trend across the industry, fares are expected to head north this year, supported by increased demand for seats in the expected, albeit slow, economic recovery and against a background of reduced capacity, and of course there is always a ready trigger if fuel prices continue to rise.

Initially, the merger may be more about American’s revival and the partnership’s competitive edge against the other big three: United/Continental, Delta/Northwest and Southwest which bought rival discount operator AirTrans Holdings in 2011. There is no more surprise left in the bag.

Grim future for airlines: Is consolidation the answer?

ACCORDING to Qantas CEO Alan Joyce, the airline industry faces an overcrowding problem. At the recent International Air Transport Association (Iata) summit in Beijing, he said: “The number of airlines in the industry is too many. It’s too fragmented, and consolidation is a good thing.”

Mr Joyce is re-championing an old strategy that more than 20 years ago was predicted to inevitably see the number of competitors reduced to a few mega airlines. One suspects that Qantas, struggling with a money-losing international operation, is crying foul over the competition posed by better-geared airlines that also provide superior customer service such as Emirates and Singapore Airlines (SIA),

Not foreseen then was the impending flourish of budget carriers, which became more than just a temporary nuisance but a threat to the more established airlines like Qantas. Qantas would meet with more competition when Scoot, a new budget subsidiary of SIA, commences services between Singapore and Sydney.

The recent spate of new mergers, particularly of giants like British Airways/Iberia, Air France/KLM, Continental/United and Delta/Northwest, seems to suggest a return to a strategy that was a bitter pill for SIA to swallow when it bought stakes in Virgin Atlantic in 1999 and Air New Zealand in 2000. The Virgin stake was a not-so-glamorous-after-all marriage which SIA has for some time now indicated interest in dissolution if it could find a suitable buyer. The Air NZ marriage turned out to be a fiasco, and was subsequently dissolved at a loss. That perhaps explains a more cautionary approach that SIA seems to be adopting today, preferring a less binding collaborative relationship such as the commercial arrangement  inked with Virgin Australia.

Consolidation is expected to come with the merits of sharing costs and risks, and the hope of confining, reducing or eliminating competition. In the present climate, cost is likely to be the primary driver in this direction. The LATAM merger, made up of Chile’s LAN and Brazil’s TAM, is expected to save US$700 million in operating costs over four years.

Unity is strength, but a good marriage demands more than just an exchange of vows, particularly when it crosses culture and geography, when it is held together by unequal strengths, and when both parties uphold different management ideologies. Qantas itself went through that rough patch with British Airways, which outbid SIA for a 25-per-cent stake in the Australian flag carrier in 1993, then ending the partnership in 2004. In 2008, rumours resurfaced of a possible Qantas-BA merger that never did materialize.

Yet as circumstances change, with the global economy continuing to languish and fuel prices remaining volatile, joining forces and leveraging on each other’s advantages in whatever form may provide the stabilizer in stormy weather.

US Airways and American Airlines may merge: The business moves in a circle

A POSSIBLE merger between US Airways and American Airlines is afoot. American filed for bankruptcy protection in November last year, and US Airways is said to be working on a bid and, according to The Associated Press, buying up internet domain names that include usairways-american.com and american-usairways.com.

This would reduce the number of major big airlines in the United States to just three, following the earlier merger between Delta Airlines and Northwest Airlines in 2008 and that between United Airlines and Continental Airlines in 2010.

Consolidation is the name of the game, but it is not new. The aviation history is dotted with as many amalgamations as there are break-ups. Nor is it unique to the United States. In Europe, there are the Air France/KLM and British Airways/Iberia tie-ups. Together, US Airways courting American argued, the partners should be stronger than they would be separate. There are pluses, particularly in network expansion.

Yet not all marriages are made on cloud nine. British Airways beat Singapore Airlines (SIA) for a stake in Qantas only to head towards a breakup. SIA itself became disenchanted in its stake in Air New Zealand and made a costly exit while still looking for a party interested in its stake in Virgin Atlantic.

But for US Airways, there may be a more cogent argument: Can it buck the trend and not go where others have gone?