American-US Airways Merger: Prices Will Go Up, Choices Will Go Down

Yesterday evening, the boards of American and US Airways both voted as expected to approve a merger of the two airlines.

And this morning, details of the proposed merger were confirmed during a joint American-US Airways press conference.

The press conference was, in effect, a celebration of US Airways chief Doug Parker’s dogged quest to take over a much larger company. Against considerable odds, he succeeded and Goliath is now David’s bitch.

As behooves a celebration, everything about the merger was cast in a rosy light, lauding the supposed benefits for all concerned.

Indeed, if the two airlines’ recent financial performance (and the fact that American is slogging through bankruptcy reorganization while US Airways is operating profitably) is any indication, a merger of the two companies will be a plus for shareholders, creditors, and other groups.

And for American’s unions, which have lost confidence in the company’s leadership, a change in top management couldn’t come soon enough. (Never mind the fact that US Airways has yet to successfully integrate the pilots unions representing US Airways and America West, following the merger of those airlines in 2005.)

But for the traveling public, the positives are far outweighed by the negatives.

The Upside: Scale and Stability

On the plus side, a return to normalcy, once the messiness of integrating the two operations has been put to rest, will be a relief for American flyers, who have been subjected to flight cancellations caused by pilot work outages and a generally elevated level of anxiety and uncertainty as a result of the company’s cloudy prospects.

The combination of the country’s third- and fifth-largest airlines will create the world’s largest airline, outdistancing both Delta and United. When the airlines have meshed their routes and coordinated their schedules, travelers should have easier access to more flights to more locations with better connections, and more opportunities to earn and redeem frequent flyer miles.

Also on the frequent-flyer front, consumers with miles in both carriers’ programs will find themselves with more robust account balances when the programs are combined and the accounts are consolidated. That means more flyers with enough miles to redeem for award flights and to qualify for elite perks.

The Downside: Fares Up, Service Down

No doubt the P.R. departments in Phoenix and Ft. Worth will make the most of those pluses.

What they will take pains to play down is the merger’s inevitable effect on airfares. Reducing the number of legacy airlines from four to three will significantly reduce the competitive pressure to keep prices in check.

What about the pricing discipline once imposed on the majors by the discount carriers? That’s mostly a relic of a past era, as the bankruptcies and reorganizations of all the surviving major airlines have largely erased the cost advantage once enjoyed by the so-called low-cost carriers. Today, the best price is as likely to come from Delta as it is from JetBlue.

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We also aren’t likely to receive an apology-in-advance for the low-grade chaos that can be expected to bedevil the integration of the two airlines’ very complex operations and infrastructures. United is still trying to make amends for the rash of computer glitches, reservations snafus, and delayed flights caused by the merger with Continental in 2010.

And then there’s the issue of the two companies’ very different service cultures. With US Airways in charge, there’s a widespread assumption that the corporate ethos of the new American will more closely resemble that of the least customer-focused of the two companies.

As well as US Airways has fared on the financial front, the airline hasn’t won the hearts and minds of many air travelers. American, on the other hand, in spite of its business issues, has managed to mostly retain the loyalty of its customers. If US Airways’ service levels prevail, it will be a downgrade for American customers.

Another downgrade: The new carrier will continue American’s participation in the oneworld alliance, considered by many to be inferior to the Star Alliance with which US Airways is allied.

On the frequent flyer front, there’s no telling which features of the two programs will carry over into the consolidated program. Any such speculation may in fact be moot as there’s a strong likelihood that both current programs will be replaced entirely by a new revenue-based program modeled after Southwest’s.

Whatever the new program’s specifics turn out to be, there’s a bumpy ride ahead for elite members. When the programs are combined and members’ miles are consolidated into single accounts, there will be more elite members competing for upgrades. And with the post-merger shedding of redundant flights, there will be fewer first-class seats with which to accommodate those upgrade requests.

Doug Parker closed this morning’s press conference by intoning, “and now the hard work begins …” For some, it’s also the beginning of the pain.

Hurry Up and Wait

Good, bad, or indifferent, nothing will happen immediately.

Before actually beginning the hard work of merging the two airlines’ operations and workforces, the deal must be approved by the bankruptcy court and federal regulators. American expects the deal to close in the 3rd quarter of this year, but that may be overly optimistic. United and Delta required five and seven months respectively to secure the necessary approvals for their mergers.

The frequent flyer program integration will take even longer. It was 22 months after their merger closed before United and Continental merged their frequent flyer programs. Expect a similar post-close interval before American and US Airways consolidate their programs.

Merger Cheat Sheet

• The new company will retain the “American Airlines” name and be based at American’s Ft. Worth headquarters.
• US Airways chief Doug Parker will be the new CEO. American chief Tom Horton will be named chairman of the new board and remain in that position until the spring of 2014 when the company’s first annual shareholder meeting will be held. When Horton departs the board, Parker will assume his position as chairman.
• American’s creditors would own around 72 percent of the new company; US Airways shareholders would get the rest.
• Based on 2012 results, the new company would have generated $38.7 billion in revenue.
• The merger expects to generate around $1 billion in combined extra revenue and cost savings for the new company.
• The new company will be valued at around $11 billion.
• Combining the third- and fifth-largest U.S. carriers will create the world’s largest airline, in terms of passenger traffic.
• Prior to any post-merger rationalization, the two airlines will have around 94,000 employees, 950 planes, 6,500 daily flights, and nine major hubs (American: Dallas, Miami, Chicago, Los Angeles, New York; US Airways: Phoenix, Philadelphia, Charlotte). Although the carriers promise to maintain all current hubs, Phoenix and Philadelphia are likely to be downsized in the post-merger “rationalization.”
• The new American will be a member of the oneworld alliance, not the Star Alliance.
• The merger is subject to review and approval by U.S. regulators. That shouldn’t be a problem since there is relatively little overlap between the two airlines’ networks.
• The actual merger won’t happen overnight. United and Delta required five and seven months respectively to secure the necessary approvals for their mergers.
• It was 22 months after their merger closed before United and Continental finally merged their frequent flyer programs. Expect a similar post-close interval before American and US Airways consolidate their programs.
• Comparisons between American and US Airways’ current mileage programs are probably moot since there’s a high likelihood that an entirely new revenue-based program (like Southwest’s) will be introduced to replace both programs.
• After the merger, 83 percent of U.S. domestic air traffic will be in the hands of just four airlines (American 26 percent, United 19.3 percent, Delta 19.2 percent, Southwest 17.3 percent).

Reader Reality Check

Is the American-US Airways merger, with US Airways’ chief Doug Parker in charge of the new company, good for the traveling public?

This article originally appeared on FrequentFlier.com.