American Airlines-US Airways Merger: Not Over Until the Fat Lady Sings

Despite a wave of enthusiasm for the American Airlines-US Airways merger that was seemingly shared by everyone except for this writer and perhaps Tom Horton, American’s CEO, it appears that the merger may not, after all, take place.

If the U.S. Department of Justice’s efforts to block the merger are successful, it will leave American in a curious position.  Until February 14 of this year, American’s Horton was steadfast in his resolve to have the company exit bankruptcy proceedings as an independent entity.  From that point forward, the company pinned its post-bankruptcy hopes on becoming a new and larger airline.

An American forced to fly solo would have to expand significantly as the airline is currently too small to effectively compete with United Continental Holdings and Delta Air Lines.  This indeed was the justification for the number four and five airlines combining in the first place.  Many airline analysts and pundits have stated that an expansion on the part of American would be bad for the industry but what they are really saying is that it would be bad for United, Delta, and Southwest and their respective stock prices.

But it isn’t a dire situation, however, for American.

While the airline will have to come up with a new plan of reorganization to successfully exit bankruptcy as an independent entity, it can in many respects achieve what it set out to do when it first filed, namely to focus on cutting costs, renewing its fleet, and increasing traffic by 20% at its five hubs – Chicago, Dallas, Los Angeles, New York, and Miami.

That plan deviated from what had been a recent industry practice of capacity cuts that did however increase the average airline fare as well as improve the bottom line of most large carriers.

American has continued to go forth with this plan in many respects, and has added routes, accepted the delivery of new aircraft, developed a new premium cabin, and unveiled a new logo and livery.

Indeed, over the past decade, the largest three airlines reached that mark by virtue of merging.  In some markets, airlines have continued to grow by leaps and bounds.  Delta, for example, knew it was too small to compete in New York so it swapped its Reagan-National slots with US Airways’ LaGuardia slots.  As a result, Delta has grown significantly in New York, has expanded in Chicago, and increased in Los Angeles.  It’s also growing substantially in Seattle.  American’s footprint in New York, Chicago, and Los Angeles is, by contrast, much too small.

If the merger is successfully blocked, and there are many indications that this may well be the case, there are no other truly viable merger partners available, and with only two-thirds the number of flights as its larger competitors, American needs to take dramatic steps in order to survive and thrive in the highly-competitive market.

Click here to continue to Page 2 – Pre-merger Strategy, US Airways Executives, and Competitive Landscape

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