Biggest losers of the American-US Airways dealFebruary 14, 2013: 11:57 AM ET
Passengers should prepare for headaches from the American-US Airways matchup. And the short-term boost for employees will almost certainly be erased later.
By Cyrus Sanati
FORTUNE -- The merging of American Airlines with its smaller rival, US Airways, will produce a number of winners and losers, with the scales, unfortunately tipped squarely in favor of the losers. While Wall Street might cheer the deal, it's hard to see how the two companies can reap any meaningful synergies given the combined carrier's high labor costs. To be successful, US Airways' chief executive, Doug Parker, who will lead the newly combined airline, needs to find some way to lower labor costs, boost revenue, shutter hubs and modernize the airline's fleet. At the end of the day, it may be easier for him to accomplish his goals by putting "the new American Airlines," back through the bankruptcy machine.
Below are the biggest losers of this airline merger. Check out the biggest winners here.
Parker will need to make good on his promise to the unions and pay them millions of dollars more in compensation than they would have received if the two carriers remained separate entities. That's going to be very tough, especially given all the merger-related costs that he will need to pay out over the next two years.
Here's a quick and dirty look at what the new American may be facing on the fiscal front. For 2012, American had a net loss of $130 million (excluding restructuring costs), while US Airways posted a net profit of $534 million. If the two were one company they would have in theory posted a $404 profit million last year.
Let's now try to get a rough idea of how much the company would need to make to absorb Parker's labor promises, excluding special one-time bonuses and profit sharing schemes. US Airways (LCC) pilots will make $272 million more a year while American's pilots will make $87 million more, which equals to $387 million in new cost -- just for the pilots, alone. Add in the $45 million extra for US Airways flight attendants, and that bumps up the figure to $434 million. Subtract that amount from the pro forma profits of the combined airline, and you get a loss of $30 million.
Those are just the numbers we know for sure. American's 24,000 ground workers will see some positions cut, but those that remain will get a 4.3% bump in pay. American's flight attendants did not release the details of their deal, but they most likely got commiserate bumps in pay, which would probably cancel out or weaken any net benefit the airline received.
This is obviously a very rough sketch of the finances of these two airlines. American has achieved some savings from its cost-cutting plan that probably aren't represented in last year's numbers, even though they claim that the process is complete. Nevertheless, it is not unreasonable to assume, based on what we know, that Parker will need some bigtime cost and revenue synergies to make this company profitable. Labor would be the ultimate losers if Parker is forced that the best way to do that would be to put American back into bankruptcy.
US Airways' Hubs -- Philadelphia & Phoenix
US Airways has had a hard time hitching up with a merger partner because it had very little to bring to the table in terms of routes. Its hubs are in tertiary and secondary cities (Phoenix, Charlotte, and Philadelphia), which are close to major cities served by the other big airlines. That compares with American's hubs, which are located in large and dynamic cities (New York, Los Angeles, Chicago, Dallas, and Miami) where there is strong demand for international and domestic travel.
Philadelphia, which is currently US Airways' most important international hub, will almost certainly see a reduction in capacity. The city is extremely close to American's New York hub at JFK, which is a much bigger and far more important international gateway. Feeder routes that currently flow into Philadelphia could be redirected to JFK to support a more robust transatlantic hub for the combined airline. While Philadelphia could probably support flights to European cities like London or Paris, it cannot on its own support flights to places like Dublin, Barcelona, Lisbon, Frankfurt, or Amsterdam. Those flights would do much better flowing through New York as they would be more readily able to attract passengers who are more likely to begin or end their travel in the New York area.
Phoenix, US Airways' current headquarters and one of its largest hubs, is going to be hit even harder than Philadelphia as it stands to lose a lot of high-paying white collar jobs to Dallas, where the new American will almost certainly be based. American decimated TWA's headquarters and hub in St. Louis when it took over the airline in 2001, so it has a track record of rationalizing and redirecting routes to larger cities. Phoenix is sandwiched between American's hubs in Dallas and Los Angeles, both major international and domestic transit points with greater domestic demand. Phoenix will quickly lose its stature in the larger airline and could see traffic fall off a cliff.
Airline mergers are painful. Combining loyalty programs, flight crews, seniority lists, fleets and reservation systems is pretty much a nightmare. Delta (DAL) and Northwest experienced a major jump in passenger complaints and defections in the first two years following their merger in 2008. United (UAL) ranked dead last in on time arrivals and first in customer complaints according to the latest government data as it tried to work through its merger pains this year. US Airways and America West customers felt the pain in 2007 after the newly combined airline suffered a major meltdown while merging their reservation systems. US Airways and American's customers will probably suffer the same fate in the next two years as the airline combines operations.
Passengers will also have fewer choices, especially those based in US Airways hub cities. If you want to know what that feels like, ask the people of Pittsburgh. When US Airways merged with America West in 2005, Parker said that he did not expect any changes to come to US Airways' operations at Pittsburgh. After all, the airline had already sliced its operations at the airport in half in the last few years, going from over 500 flights to 233 flights per day. But the next year Parker reduced the number of flights in and out of Pittsburgh to 170. Today, US Airways only operates 41 daily flights out of Pittsburgh. International travel in and out of Pittsburgh is now almost nonexistent, forcing residents to fly or drive to a larger city.
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A decrease in capacity allows airlines to charge more for the same service. This helps the bottom line but it also hurts business and leisure travelers who wil now have to fork over more cash. Since 2009, the year Delta started merging its operations with Northwest, the average domestic ticket price in the US has jumped 21%, from $310 to $375. A portion of that can be explained by the financial recovery, but certainly not all of it. Airlines have rationalized routes, cut capacity and entered into closer agreements allowing them to legally collude. Further consolidation in the industry will take even more capacity out of the market, impacting prices.
It is unclear if Parker can raise fares fast enough to cover the pay raises he used to lure American's labor over to his side. There is a lot of work to be done in the next few months to get passengers comfortable with the idea that things have changed.