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.

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.

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.

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.

Security or privacy: You decide

Following a failed attempt by a Nigerian to ignite an explosive device aboard a Northwest Airlines flight as it prepared to land in Detroit on Christmas Day (the suspect had hidden the device in his underpants), the United States has gone ahead to implement the scanners that can see beneath clothing.

People opposing the initiative have labeled the technology as an abominable, virtual strip search.

Opinion is divided among airport authorities.

Britain, France and the Netherlands support the US initiative. But other European nations are not rushing into it. Spain has expressed skepticism. Germany thinks rules on flight safety need to be changed before implementing the scanners. Many are concerned about the intrusion of privacy – which has become the battle cry of civil rights groups – and possible health hazards.

Canada may allow passengers to opt for either the scanning or a pat down.

Airports in other parts of the world by and large are non-committal at this stage.

It should be simple enough, one would have thought. Security or privacy, you decide. Yet it is not.
Of more concern should be the issue of security implementation in its entirety. Full-body X-ray scanners, which are not exactly new, are just another allegedly improved measure of detecting hidden subversive devices. The question is: why wait till an “underpants” bomber threatened to blow up a plane?

It would seem irresponsible of any government not to do something following such an incident, though not so much to send a message to would-be terrorists that security measures are being tightened as to shore up travellers’ confidence that air travel has become safer as well as public confidence in an administration that quickly reacts to take control of the situation.

Hard-core terrorists will continue to look for ways to circumvent the system. It may not be the stuff of movies when suicide bombers have explosive devices implanted in their bodies. What next then? Already we are amused by cartoons in the media of air travellers stripped down to their underclothes being rolled through scanners on the conveyor, just like their luggage.

Quite naturally we are always quick to consider what else we can do but it would be a mistake to not consider possible lapses in current practice.

In the case of the Nigerian “underpants” bomber, prior critical knowledge about the terrorist was not shared with the relevant parties. His name appeared in the US database of suspected terrorists, yet he was not subject to more stringent security screening. He went through security checks undetected not only in Lagos where he started his journey but also at Schiphol Airport in Amsterdam where he changed planes.

Would a pat down have detected the explosive device hidden in his underpants? Technically it should expose him, yet there is a possibility however remote that the security personnel could miss it.

There have been other reports of unauthorized entry into secured areas under the very eyes of security personnel at exit checkpoints and of travelers equipped with explosives or dangerous weapons escaping the attention of screeners. Such occurrences may be few, but even one incident is too many and can spell a major disaster.

How to reduce human error will continue to be a mammoth challenge. This is aggravated by complacency as the fear of a threat recedes, as when the 911 debacle of 2001 becomes ancient history. So too, in a matter of time, will a seeming improved security environment provide the expedience of putting the scanner on the back burner? Nonetheless, even with full-body X-ray scanners, there is no guarantee the screeners will not slip. This does not suggest that the device should not be introduced, but if implemented how best it can be done.

Inevitably this raises more urgent concerns about the quality of the handling staff. At many airports, security personnel continue to rank low in the job strata. Expressed privacy concerns of full-body X-ray scanners are just another reason to reassess the professionalism of airport security staff, and in this case, can they be to earn the kind of trust that we generally have in doctors and nurses?