Assessment 2- Airline Mergers American Airlines and US Airway Trends and opportunities in Hospitality and Tourism

Submitted by Students Name: Trinh Hong Nhung Student Number: 002HS413

Contents
Introduction ............................................................................................................................................ 3 American Airlines/ US Airways Merger & Acquisitions: ......................................................................... 4 The Merger Effects:................................................................................................................................. 5 A Better Flight Routine & Customers Program ................................................................................... 5 Price controlling .................................................................................................................................. 6 A Better Service Quality ...................................................................................................................... 6 Less Resistance.................................................................................................................................... 6 Conclusion ............................................................................................................................................... 8 References: ............................................................................................................................................. 9

Introduction
American Airlines, Inc. (AA) is a major U.S. airline owned by AMR Corporation, headquartered in Fort Worth, Texas. It operates an extensive international and domestic network, with scheduled flights throughout North America, the Caribbean, South America, Europe, and Asia/Pacific. Dallas/Fort Worth International Airport is the airline's largest hub, with American Airlines and AMR's regional carrier American Eagle accounting for about 85% of the traffic and 83% of the landing fees at the airport and traveling to more destinations than from its other hubs (Chicago tribune, 2012). US Airways is a major U.S. airline owned by the US Airways Group, headquartered in Tempe, Arizona. It operates an extensive international and domestic network, with 198 destinations throughout North America, South America, Europe, and the Middle East. The airline is a member of the Star Alliance Network and utilizes a fleet of 346 mainline jet aircraft and 285 regional jet and turbo-prop aircraft. The carrier operates the US Airways Shuttle, a US Airways brand which provides hourly service between Boston, New York and Washington, D.C. Regional airline service is branded as US Airways Express, operated by contract and subsidiary airline companies. As of January 2013, US Airways employed 32,213 people worldwide and operated 3,028 daily flights (Charlotte Business Journal, 2012).

American Airlines/ US Airways Merger & Acquisitions:

In January 2012, US Airways Group, the parent company of US Airways, expressed interest in taking over AMR Corporation, the parent company of American Airlines. In March, AMR's CEO Tom Horton said that the company was open to a merger (Joyce & Writer, 2012). US Airways told some American Airlines creditors that merging the two carriers could yield more than $1.5 billion a year in added revenue and cost savings (Charlotte Business Journal, 2012). On April 20, American Airlines' three unions said they supported a proposed merger between the two airlines. Under chapter 11 bankruptcy protection, American Airlines had been looking to merge with another airline. Earlier in July, a Bankruptcy Court filing stated that US Airways was an American Airlines creditor and "prospective merger partner"; on August 31, US Airways CEO Doug Parker announced that American Airlines and US Airways had signed a nondisclosure agreement, in which they would discuss the possibility of a merger (Reuter, 2013). In February 2013, American Airlines and US Airways announced plans to merge, creating, by some measurements, the largest airline in the world. In the deal, which is expected to close in the third quarter of 2013, stakeholders of AMR will own 72% of the company and US Airways shareholders will own the remaining 28% (USA Today, 2013). The

combined airline will carry the American Airlines name and branding; the holding company will be renamed American Airlines Group Inc. The US Airways' management team, including CEO Doug Parker, will retain most operational management positions. The headquarters for the new airline will also be consolidated at American's current headquarters in Fort Worth, Texas. US Airways will exit Star Alliance upon completion of the merger, and American will retain its One world alliance.

The Merger Effects: A Better Flight Routine & Customers Program The converging route maps of the two airlines, which would end up with nine hubs. AAs strongholds in DallasFort Worth, Miami, Chicago, LA, and New York, plus US Airways in Phoenix, Charlotte, Philadelphia, and Washington. If the past is any guide, mega-mergers usually mean some hubs get stronger while others slim down. For example, when American acquired TWA, the latters St. Louis hub withered. And Delta has severely cut service at some of its Midwest hubs like Cincinnati, after its merger with Northwest. This merger will most likely be favorable to customers. Foremost, the AA/ US Airways merger will increase available routes. For instance, both AA and US Airways have extensive international routes but in different areas of the international market. If AA/ US Airways will merge, the consolidated entity will have clout in more of the lucrative business routes in major international markets. Opponents of the merger have been apprehensive of the extended reach of the combined entity in both the U.S. and international markets. They fear that since this merger would produce the largest U.S. airline, this would result in a reduction in free competition, which they argue may lead to increased prices and less options for the consumer. These fears are unjustified since AA/ US Airways complement each other; these airlines cover different routes and hubs. As a result of this, low-cost carriers could fill these gaps and provide customers with lower prices on plane tickets for these areas. Therefore, customers will have more of a choice in selecting their airline service. Customers will be able to fly either low-cost carriers that have lower priced tickets or the Delta-Northwest entity that will have more travel routes. Furthermore, in order for AA/ US Airways to compete with low-cost carriers, they may need to reduce costs, which may in turn lead to better fares for customers. Finally, in the consolidated entity customers
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will be able to combine their frequent flyer miles from each airline into the merged entity's frequent flyer program. Price controlling Perhaps the most concerning of all is the possibility of fare increases. With reduced competition from a lower number of carriers, airlines will have the ability to further increase their fares. Surveys show that prices have increased significantly in the past year while capacity has decreased, which is creating the perfect storm for concerns about future fare prices. Price increases, especially in routes with reduced redundancies, are very likely. A merger among major carriers would certainly lead to reductions in service and usually a dramatic reduction of flights at one or more hubs. In fact, among the arguments for airline mergers are reducing redundancies and achieving "economy-of-scale" benefits. However, everything in business and pricing comes down to competition. Where there is none, companies have the ability to price at a higher level, and get that price, especially in an industry where consumers have few other choices. When it comes to air travel, there are many times where consumers simply have no other means to get where they need to go. If one airline dominates that market, it will set the price until demand goes away and it is forced to lower the price to once again spur that demand. A Better Service Quality Merging airlines are typically quick to market the many benefits of such a venture, putting increased efficiencies at the top of the list. Catchphrases such as greater efficiency and reduced redundancies become all too common and seem a bit untrue, although they may not be. Airline consolidation can mean less congestion from reduced players in the market and fewer delays resulting in a better overall travelers experience. In that respect, mergers can mean that flights get to their destination on-time and that travelers enjoy more streamlined check-in procedures. Less Resistance One major carrier will initiate an airfare increase and then the industry watches to see if others will match; if enough key players are strong enough to resist such an increase, then the initial fare hike will be withdrawn. This same principle has applied to the introduction of airline fees, particularly baggage fees, which recently topped a Consumer

Reports poll of 2,000 travelers as the most annoying complaint about airlines. And theres a greater need than ever for such resistance: The DOT recently reported that in 2009 airlines generated $7.8 billion in such "ancillary revenue" fees, an increase of 42% over 2008 (Joyce & Writer, 2012). Airlines also have employed this "matching" method to initiate changes to frequent flyer programs; new service initiatives; and even policies such as reducing travel agency commissions. If the airfare market is built by domestic industry with fewer major airlines, the likelihood of a rival carrier resisting a new fee or airfare increase will be much less likely. Conversely, there will be less chance of a single carrier successfully introducing consumer-friendly initiatives.

Conclusion
Although some potential barriers remain, mainly getting the necessary financial and legal barriers. Although the hard part of actually combining the two disparate lines remains, everyone in the industry would be hugely surprised if the deal doesn't get the required approvals and proceed. It is in this framework that the American-US Airways merger needs to be looked at. Although there will be some competitive overlap, particularly at national airports where both American and US Airways have a substantial presence (US Airways providing the North East Shuttle service as well as regular service), such overlap will be investigated by the antitrust authorities. Actually, the two networks are quite complementary and will provide consumers with more choices and improved quality of service. In particular, East Coast residents where US Airways has its major eastern hubs will benefit from increased domestic and international connections.

References:

1.

Joyce, M., Writer, S. 2012, "US Airways CEO confirms interest in American Airlines". Charlotte Business Journal. Retrieved March 24, 2012.

2.

Charlotte Business Journal, 2012, "American Airlines open to merger, CEO hints", 2012, vol 12. March 19, 2012.

3.

Chicago tribune, 2012, "3 unions push American Air toward US Airways merger talks". April 22, 2012.

4.

USA Today , 2013"American Airlines' CEO to get $20 million severance", Domestic Mews, February 19, 2013.

5.

Reuter, 2013, "American Airlines, US Airways unveil $11 billion merger", Business News, February 14, 2013.