After discussing this topic with JDiver, he suggested I start a new thread to look at what the possibilities are for American in addition to the highly-publicized potential merger with US Airways.
The impetus for this was an article I wrote for Frequent Business Traveler laying out some possibilities. I'll quote some relevant bits and pieces from the article below but let's try to look at all of the possibilities here for the path AA could potentially follow.
If there’s one thing that’s certain in any merger, it’s that nothing is certain. History is filled with the detritus of failed mergers, ranging from AT&T and T-Mobile USA to United Airlines and US Airways. Of course, even a consummated merger isn’t always cause for celebration: just look at Time Warner and AOL or Sprint and Nextel.
In both the airline world as well as the world of M&A, the current focus is on American Airlines and US Airways. Four legacy carriers have already undergone mergers (United with Continental, and Delta with Northwest), forming the two behemoths in the industry. US Airways wants to merge with American, even though some aspects of its 2005 merger with America West have yet to be completed.
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Just days ago, American announced a codeshare agreement with Qatar Airways, the state-owned flag carrier of Qatar.
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One day earlier, American announced a significant expansion of its codeshare agreement with Air Berlin, a carrier that is 29% owned by Etihad Airways
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The most interesting tidbit came out earlier this week, when it was disclosed that American believes that the company has increased in value during bankruptcy proceedings..
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Yep, a thread discussing OTHER options than the much discussed AA-US merger is a reasonable way of shredding out the opinions and possibilities.
Of course, one option is AA emerging from Chapter 11 with its new operating plan, negotiated new contracts with employees and the significant cash they have on hand.
I think there would be more surprising things than seeing petrodollars or IAG Euros / Pound Sterling invested into a piece of AA at some point.
US, well, it has been invested in mergers for quite some time - it seems to never have seen a merger it didn't want, claims it needs to do so to have the necessary mass to survive, etc. but as the US merger thread indicates, there are some significant barriers to overcome.
So what next? I'd still like to see AA emerge as - American Airlines.
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This is one of those interesting topics where the underlying biases will often drive the conclusions. I will now ramble, mostly randomly.
First obvious question is, does AA need to merge with anyone? A lot of the talking heads out there say yes, but they don't say why. To have "sufficient market share"? Not a valid argument. It's like all the utter morons who have been saying that RIM is "dead in the phone market because their market share has been falling" Yet, what they don't want to discuss is that (up until the last quarter actually) RIM had the same & increasing number of paying customers as when the, say, iPhone came out. So, revenues were still robust. What it did miss out on was the increase in the overall market size. But again, so what? Doesn't imply anything about their profitability, per se. Just means they didn't add customers. Same with American: are they profitable or not has zero to do with their market share per se.
(Related sidebar: No, I don't buy into the argument that a company must increase profits every year or "something is wrong" - if you think about that for even a second, that's a ridiculous proposition and defies logic, and economics for that matter. What's actually wrong with steady, constant return?)
Second question is how to measure value & performance. A lot of people, including people here & in the industry, do it via revenue per passenger kilometre. Good measure of return per passenger and relative performance between airlines in extracting profit, but it's only half the story. I'd say it's only a good measure for airline performance if you also measure cost per passenger kilometre as well. Most measures of business health are input costs and output returns, yet the airline industry is one of the few that refuses to use the input measure (except in relation to unions, which are seen as the enemy, which is another unfortunate story entirely) and either conflates it with outputs or simply ignores it. If you do look at the numbers that's the real problem most US carriers have: their inputs are simply too high. Interestingly, it's not often the unions that are the high input cost for most of the large carriers. It's actually the management and operating layers - they're bloated and too focused on chasing this bizarre idea of "profits must increase or we're doing something wrong" vs simply returning solid profits.
I'd say AA has the size to be competitive with the other large US carriers. It needs to reduce input costs. It also, in order to differentiate itself in the market, needs to raise both the hard product and soft product. Hard product isn't too bad within the US in comparison to other carriers. It's awful internationally, so that's where the focus on hard product needs to be. Soft product, however, is where it can improve dramatically, like all US carriers could. It's simply awful. That's also the easiest to fix because it's simply poor training and even poorer supervision & management that gives bad soft product. Improve that and they will stand out. Heck, deliver consistently on it at even an average level and they'll be beating the competition. Higher revenues flow on from there: people are willing to pay a premium for better service. It's how Southwest has managed to raise their prices to the point they're no longer really a low cost carrier: they're perceived as delivering better service and continue to sell the "low cost, better service" idea.
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That's it - it seems AA has improved its RASM by a variety of means (increasing the percentage of seats sold per flight), outsourcing from Eagle to SkyWest and Cape Air, outsourcing 777 maintenance to Kong Kong, extending codeshares, etc. etc. We'll just have to see what emerges, but it sounds like it at least may emerge sooner rather than later.
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What I'm really curious about is which, if any, other airlines will step forward and invest in AA.
IAG already said it might come to the rescue, so to speak, and AA has strengthened relationships with QR (I'm more than a drop familiar with the Al Thani family in Qatar) and Emirates has expressed its desire for world domination not to mention Etihad, which is moving in on Air Berlin (and AA just strengthened its partnership with AB).
So those are the four candidates I would throw out there (on a personal basis, not wearing any hats representing my employer, Accura Media Group, publisher of Frequent Business Traveler).
The attitude at AA definitely seemed to be focused more on organic growth as opposed to a merger that offered little. There might be enough synergies to make a merger with US interesting, but in the end there is so much baggage that would come with US that I really hope it doesn't happen. Assuming it doesn't, here are the 4 things I think AA needs and what I see them doing.
1. A stronger East coast presense: This is the one area that a US merger would actually help, but I'm not convinced they can't do better alone. AA used to have a much larger presence at RDU and could do so again with increased feeder traffic available. The increased ability to codeshare might allow AA to grow here again and perhaps compete with the US hub at CLT. RDU O&D business traffic is already stronger and growing as fast or faster than CLT traffic, so it could become a viable location for additional flights to Europe in addition to East coast connecting traffic. Organic growth here has the potential to be far more profitable than any synergies achieved through merger, and has the added benefit of increasing the likelihood of yet another US bankruptcy in which AA could potential buy only the pieces of US that it wants.
2. A stronger West coast presense: Perhaps the hardest need to solve for AA without a merger/acquisition. They're weaker than DL or UA here and organic growth would be very difficult. There isn't room to grow at LAX and AA doesn't have any other viable locations to turn into a hub, much less a fortress hub. The only acquisitions that could potentially help would be Alaska or Hawaiian, and HA doesn't do much. It would only succeed in making AA less weak in the west, but has the advantage of being relatively easy since they could just buy HA outright and barely scratch their cash reserves. Alaska would be the more desirable acquisition, but difficult to pull off given their high value and low interest in a merger. Failing that, AA might have to accept being at a disadvantage to their larger competitors in the West.
3. Increased footprint in Asia: This will likely wait until the arrival of the 787s that AA has on order. Some of the new 777s could be put to good use here, especially considering how full the current China flights are, but without good slots at PEK and PVG there isn't much interest in growing this market. AA has seriously considered routes to CAN as a way to increase their presence in mainland China, but so far it always makes more sense to use the planes they have on more profitable routes. (i.e. Brazil) AA also needs routes to some of the major business hubs (i.e. ICN) that are currently only served with a connection at NRT. I have no doubt that AA could serve some routes to Asia profitably now, but with a limited quantity of 777s they will use what they have on routes that have higher margins. Which brings us to point 4.
4. More growth in Latin America: This one isn't so much a need as a good thing for AA since they are already the dominant carrier between North and South America, but it is one of their most profitable regions and it's also one of the fastest growing business markets in the world. AA wants to fill that demand in order to keep their competitors out, most of whom are desperately watching for any opening. Also, one of the biggest growth markets in the world right now is traffic between Latin America and Asia. Some markets can be done non-stop, but not all, so if AA executes step 3 above then they're well positioned to serve that market with a connection in one of AA's hubs.
Of course we could still see a merger with US, but it will be much less likely if AA has more highly profitable months like we've seen recently.
I think first and foremost what AA needs post bankruptcy is a new management team that shakes things up. Most companies that proposer post bk typically have that. Seems esp true in this case given all the bad blood with employees.
1) The standalone plans are reasonably interesting and credible.
American has a bunch of assets. With a more efficient set of work rules / pay they will be competitive. They stuck with a PBS etc to avoid some of the abuses in scheduling.
A capital injection would be needed at some point in the future because they didn't dump the pensions. I do think an injection of cash from even Emirates / IAG is possible, though emirates is more complicated given AA's relationship with BA. So that's one option.
2) Merge with another, likely smaller partner.
Capital would come from outside investors. Partner would be smaller and the AA CBA would likely be superior which would ease integration.
I tend to dislike outside capital and the money may not have the airlines interests at the top of the list. Plenty of outside capital loads up on debt to get a return and then runs, no fun for flyers or employees.
3) Codeshare / JV heavily
AA seems happy with the partner flying model JV with BA.
An AA / Emirates tie up is something that is wild to consider.
Emirates has a fair bit of lift out of DXB. With BA into LHR for Europe and Emirates into DXB for middle east / asia, that would be a network.
1) The standalone plans are reasonably interesting and credible.
American has a bunch of assets. With a more efficient set of work rules / pay they will be competitive. They stuck with a PBS etc to avoid some of the abuses in scheduling.
A capital injection would be needed at some point in the future because they didn't dump the pensions. I do think an injection of cash from even Emirates / IAG is possible, though emirates is more complicated given AA's relationship with BA. So that's one option.
2) Merge with another, likely smaller partner.
Capital would come from outside investors. Partner would be smaller and the AA CBA would likely be superior which would ease integration.
I tend to dislike outside capital and the money may not have the airlines interests at the top of the list. Plenty of outside capital loads up on debt to get a return and then runs, no fun for flyers or employees.
3) Codeshare / JV heavily
AA seems happy with the partner flying model JV with BA.
An AA / Emirates tie up is something that is wild to consider.
Emirates has a fair bit of lift out of DXB. With BA into LHR for Europe and Emirates into DXB for middle east / asia, that would be a network.
Yes will probably need some capital they can raise. But in the end it's the management issue they have to solve if viable standalone. That largely has been a board issue but management choose the board so no shocker there. The earnings calls were just comical prior bk how they just made up stories yeah yeah we got a handle on it and the analysts didn't buy it at all.
Folks miss the issue of why AA failed these kinda of tactical issues. You just have to get real an wise up the the culture failed.
Did the culture fail, or did prior managements make a near fatal mistake by believing they could restructure, compete outside of BK, unlike ALL of their competitors, eventually ran out of options.
Current picture would be VERY different if AMR bit the bullet when CO, DL, UA, US did, moved on - labor issues would not be contentious, many of the MD-80s would have been retired by now.
I think first and foremost what AA needs post bankruptcy is a new management team that shakes things up. Most companies that proposer post bk typically have that. Seems esp true in this case given all the bad blood with employees.
The problem I see with this is that part of the "bad blood" is based on cuts that had to be made because the business was not profitable. If they bring in new management, and the business is still not profitable, what can a new management team do differently that will not result in similar bad blood? Now, restructuring in bk could help with this, in which case the reason behind the problems go away. In that case, a new team will be on a better footing, and could avoid the bad blood. In that case, it would be a good idea for current management to fall on their swords, whether it can be interpreted as their fault or not, to get a fresh start.
