American Airlines and US Airways reportedly seek merger extension

[eolesen]

2-Love Field opens up next year. 3- Delta just got has gotten or is on the verge of anti-trust approval with Virgin.....Hence folks the competitive landscape is changing very quickly.

The impact of both of these on competition are grossly overstated....

 

[WorldTraveler]

The impact of both of these on competition are grossly overstated....

More accurately, your post should say,
“I am praying five times per day to each of Mecca, Jerusalem, and Machu Picchu that the impact of just these two factors on AA are grossly overstated.”

And yet the evidence is overwhelming that both of these factors really will be some of the most significant strategic challenges AA has faced – and AA is certain to lose key revenue and share because of them.

Let’s try with WN and the Wright Amendment which will fall in a tad over a year.

AA controls almost 2/3 of the domestic market at DFW and the same 2/3 of the market from the combined DFW/DAL market to cities beyond the perimeter. AA's share of markets in which WN can compete in from DAL are far, far lower with WN carrying the vast majority of the traffic in the shorthaul markets inside the Wright perimeter. More significantly, AA’s average fares in AA’s top DFW domestic US markets are 33% higher than they are from ORD where WN has a strong hub at MDW which absolutely influences fares at ORD. Despite the limited size of MDW compared to ORD and its less favorable location relative to the largest/richest business areas, WN still manages to get 25% of the domestic ORD market. IN the Metroplex, WN gets virtually nothing outside of the Wright perimeter today. As has been noted, Love Field is closer located to the top regions of the Metroplex than any other secondary airport that is a WN base in a multiple airport city to the primary airport that is a network carrier hub in that city. Further, DFW and DAL are far CLOSER making it far easier to get to DAL from regions of the Metroplex than it is to reach BWI from downtown Washington, Hobby from corporate travel rich west Houston and the Galleria area, and Midway from the northwest suburbs of Chicago.

You need only look at what happened to the combined DFW/DAL share in the exception (longer haul) markets outside of the Wright Amendment that have been added over the past ten years, including STL and MCI. WN entered the markets with deep discounts and in less than six months ended up with half of the share; even after fares began to rise while AA’s actual revenue fell by half or more because of their reduced share and the lower fares.

Further, increased low fare competition has repeatedly allowed other network and low fare carriers to grow their presence by riding WN’s coattails into the market which will likely lead to increased presence of lower fare carriers in markets even from DFW.

Add in that WN’s international operations at HOU will allow them to funnel enormous amounts of traffic to Latin America from the Metroplex via HOU and the impact is not going to be limited to just domestic markets.

The evidence is OVERWHELMING that AA will lose significant revenue and share in its largest north Texas domestic markets in a little over a year followed by erosion of its key Latin markets shortly thereafter.

As for the DL and VS joint venture, the evidence is again overwhelming that joint ventures do work to allow competitors to grow their presence and increase their market share. You can’t both argue that AA’s JV with BA is effective while also arguing that DL’s won’t be. When you consider that the DL-VS joint venture is providing DL domestic feed to VS in markets where VS has never had a presence and DL is now pushing passengers onto VS flights in key markets like SFO, LAX, MIA, and ORD where DL has never been a viable competitor to LHR and DL will gain share in those markets while VS will grow its presence in markets beyond their gateways because of DL’s domestic feed. The same principle will happen in the UK because of VS’ beyond LHR flights.

Add in that DL has repeatedly demonstrated its ability to grow its presence in NYC and take share from AA, then the DL-VS JV has the greatest potential to take share in a market which is highly dependent on corporate revenue and where AA-BA’s combined size have allowed AA to retain corporate revenue which could well be at risk now. Note that DL has consistently said its fastest rate of corporate growth has been in the financial sector which is heavily concentrated in NYC, which disproportionately uses JFK-LHR, and which pays fares well above average.

For years we’ve heard here that Crandall said that AA didn’t need to build a network to serve all of the cities that DL and UA (even pre-merger) flew to because AA could dominate the top and richest markets. They did that with LHR and with Latin America and had a strongly advantaged position in markets where other carriers could not enter. With the DL-VS JV and the advent of Open Skies in Latin America, AA will be losing it grip on its largest and richest int’l markets.

No one can honestly believe that AA will not be deeply affected by the same type of competitive changes that will be occurring in both the Dallas-Ft. Metroplex and AA’s LHR and Latin America markets all at the same time.

I suppose they can keep praying that won’t be the case, though.

No airline has successfully navigated the number of strategic challenges that AA will face over just the next two years without significant financial impact.

The longer the merger is delayed, the closer AA's emergence and the merger comes to these key strategic events. Even on a standalone basis, AA's emergence was deadly close to the implementation of these key strategic challenges; the fall of the Wright Amendment has been known for years.

Considering that AA's CASM isn't even the lowest among network carriers - and still considerably higher than WN's based on the most recent quarterly data, AA is still HIGHLY vulnerable to the same competitive incursions that have resulted in far larger revenue losses for AA than for any other carrier.

Further, we still haven't seen the impact of any divestitures at places like DCA that will be necessary to get the merger thru.


You might want to hold off on your bold pronouncements about how immune AA will be to new competitors until there is actual data to show what has really happened.

 

[Reed Richards]

Possible mediation next week hinted at in this news video: http://www.nbcdfw.co...-Deal/223569991 RR

 

[FWAAA]

I don't know whether WN will eat AA's lunch just because it can fly anywhere it wants from DAL next year and I don't know whether adding DL and VS together in their TATL joint venture will harm AA/BA/IB. Since US doesn't add very much strength at DFW and adds just about zero strength to/from LON, then the effects of those two changes would seem to be a constant that will harm AA regardless of the merger. If those two changes severely cripple AA, then those two changes would cripple the merged US-AA, no?

 

[WorldTraveler]

yep... these are major strategic challenges that the merger won't fix.

All the merger will do is help "dilute" out the effect of the overall strategic challenges to more markets of which DFW and LHR are just a smaller set.

What has been consistently shown on this and other boards is that AA fans have consistently underestimated the threat of strategic challenges to AA and overestimated AA's ability to overcome them. IN fact, DL and WN have both consistently succeeded over the past 10 years in pulling valuable revenue away from AA and these new challenges are far larger than any that AA has faced up to this point.

AA's strategic plan set forth by Crandall of concentrating in a handful of markets was a mistake simply because it has been obviously for 35 years that the world is moving towards more competition. The timeframe for AA to continue to reap profits because of its position in limited access markets was limited for a long time... and now just as AA is supposed to be restructuring itself, the challenge is larger than ever and there is a confluence of the largest and most significant competitive events that uniquely affect AA all occurring over a couple year period.

As always, I am more than happy to allow history to adequately judge whether what I am saying is true or not and I will go on record as saying that "the effect of both of these (and more) is grossly exaggerated" will be shown to be incorrect.

 

[eolesen]

All your verboseness doesn't change the facts, WT.

1) DAL is in effect a slot controlled airport, in that they're capped by legislation on the number of gates, and even with a 45 minute turn, there are still only so many flights a day they can push thru the place. During peak business hours, their gates are fully utilized. For new service to be added, they'll have to subtract elsewhere, and that will have its own ripple effect.

2) VS has a great reputation and strong brand, but in the end is still a tiny, tiny airline. If they were so valuable, why didn't someone like LH or one of the Gulf carriers invested in them instead of DL?

Ranked 32nd largest on an ASK basis, 70% of their traffic is to/from North America. Aside from the proxy flying, they don't serve any destinations which DL wasn't already serving. The JV will help strengthen their position relative to BA, but you can't compare the BA hub to what VS can offer.


No prayers necessary. The facts absent cheerleading and wishful thinking speak loudly enough.

 

[WorldTraveler]

thanks for your response, E.

1. WN execs said years ago that they would pull down flying to current destinations in order to add new flights outside the Wright perimeter when they can. The 738s will help offset the loss of frequency but WN so dominates these markets they have very little chance of leaking that traffic. WN also connects traffic over DAL today that they can shift elsewhere to make DAL an even more local-market focused hub.
2. VS may not serve any cities that DL doesn't serve but VS most certainly does a number of routes that DL doesn't or can't serve including LAX/SFO/ORD/MIA/IAD/EWR-LHR. DL carries virtually none of that traffic now. As much as you and others might want to think otherwise, DL is the 2nd largest airline in the US and has been aggressively shifting business from AA and UA to DL. I'm not the only person who has recognized that... there were several articles just recently as DL joined the S&P 500 that showed how successful DL has been at shifting traffic away from AA and UA. VS' existing LHR flights will gain a much larger marketing presence in the US while DL's will in the UK, including the opportunity to connect passengers beyond LHR to other UK cities for the first time.
The DL-VS JV is focused solely on the local UK market and nothing beyond the UK because that would compete with DL's JV with AF/KL/AZ. What BA does with the hub is immaterial to DL-VS. In terms of the local UK market, DL/VS will have about half of the market compared to AA/BA.... that is a very significant increase compared to what either DL or VS have had so far.

I appreciate your optimism for AA but for years, I have been saying that AA was losing share in NYC and people doubted me... now they have half of the share that DL or UA have. DL is picking off key AA NYC markets one by one and doing that very successfully. AA has lost share at ORD to UA. AA is holding onto its position LAX by flying a lot of unprofitable flying which is unsustainable long-term. AA's presence in the Pacific is largely money-losing and 2nd or 3rd to DL and UA outside of DFW-NRT; and as I have said, KE is now throwing more capacity into AA's new DFW-ICN route just as the peak season ends and as DL has the US government contract for DFW-ICN, codesharing on KE's flight. Open Skies are coming in Latin America and WN's int'l growth from will directly target AA and UA's central US-Central America and northern S. America markets.

For its part, WN has surpassed AA in every one of AA's former hubs that have been shut... WN is not going to take down AA's DFW hub but no one could honestly believe that the 2nd largest hub in the US which has existed for more than 10 years with no hub competitor and a protected position in the region because of Wright is going to be immune when those barriers start to fall. Likewise, AA's largest and most profitable markets, LHR and GRU and others in Latin America, have been restricted access to competitors for years to AA's advantage.

AA is not singularly being targeted by th ese strategic moves. The DL-VS JV challenges UA perhaps even more than AA-BA since UA doesn't have a UK JV partner and also doesn't fly JFK-LHR, the largest and most valuable US int'l market. DL's SEA transpac hub provides a true viable alternative to UA's SFO hub. But UA doesn't face the domestic challenges that AA faces and UA's presence in Latin America is far smaller than AA's. UA is also doing better in NYC and ORD against low fare competitors.

AA waited too long to get the ship turned around and expects that new airplanes and cost cuts will fix the problems. AA is putting a lot of faith in cost cutting including labor cost cuts just like what US has done for years to get costs down to levels to match revenues yet US still realizes that they must grow revenue in order to have a long-term future. BK doesn't fix revenue generation and all summer long AA has touted record absolute RASM even though its RASM growth has been below the average of its peers. AA's RASM has been below its peers for years and now that AA is about ready to make some progress in fixing it, they face a number of major new challenges including Wright, LHR, and Latin America.

The merger may be the next best hope AA has to compete but a merger - which will take years to consummate - cannot fix the significant strategic errors that AA has made. Add in that US has done much of the same thing by pulling back in key markets and hubs and practically given away valuable access to NYC and will have to do the same at DCA in order to get the merger thru and we are seeing the very same trajectory that has played out for AA and US individually continue for years into the future.

Maybe I will be wrong but I don't see anything to show me other than prayers that the next few critical years will be any different than the past ten.

 

[Bob Owens]

PLAN B was the merger. PLAN A was the stand alone plan. We took concessions on Plan A then all of a sudden the merger looked appealing.

I think he is speaking as a USAir worker, they have no "Plan B", their plan was to merge with AA. Maybe thats why they never seriously pushed in negotiations, they believed Parkers hype about how they will pay better when they get big enough, ignoring the fact that WN, B6 and other smaller carriers were paying better than US.

 

[jimntx]

The impact of both of these on competition are grossly overstated....

Oh, I guess you mean that when WN reduces/eliminates DAL-LBB in order to use that gate/slot to do DAL-LAX or DAL-LGA, we won't even notice the loss of business. Just like STL. WN making STL almost a hub had no effect on AA's presence there at all. Well, except for the fact that we went from 200 departures/day in 2004 to 30 or 31 today. No effect at all.

Correction: I was just looking in Sabre, and I can only find 27 mainline departures from STL for Monday, 9/16/13. Of the 27 departures, 9 are to DFW and 8 to ORD. I know there are some AE departures, but I really don't think this discussion is focussed on the STL-RAP market.

One bright spot. I noticed that they decided to re-think their strategic decision to reduce STL-DCA to all AE flights. We are back to 3 mainline flights/day on that route.

 

[FWAAA]

Here are some of the destinations that WN may want to serve nonstop from DAL next year: ATL, BWI, BOS, BUR, MDW, CMH, DEN, FLL, RSW, IND, JAX, LAS, LAX, BNA, LGA, EWR, OAK, MCO, PHL, PHX, PIT, PDX, RDU, RNO, SMF, SLC, SAN, SFO, SJC, SNA, SEA, TPA, TUS and WAS. Most of them are pretty big places and a few of them are among WN's top ten stations. Obviously, WN can't serve them all from DAL with sufficient frequency to attract any significant share of the business travelers even if it cancelled all of its current 129 weekday departures to cities within the Wright Amendment area. From DAL, WN flies 25 weekday departures to HOU, 13 to SAT and 12 to AUS. I'm guessing that those 50 departures are fairly safe. I doubt that frequencies to MCI, STL, MSY, OKC and TUL will be gutted, as they're fairly big markets. I'm certain that the end of the Wright Amendment will permit WN to attract some current AA customers, but I disagree that it's as bleak as management painted in its bankruptcy court filings. Recall that AA management cried about how it already faces low-fare competition on most routes from DFW and next year, the few remaining ones might face WN competition from DAL.

 

[WorldTraveler]

Let me throw a few numbers out to provide some sense of how much room WN really has to grow at DAL since there seems to be a lot of doubt that they really have room to grow.

WN's peak day schedule in Sept. has 128 flights per day with an average aircraft size of 137 seats/flt.

If even half of DAL's flights are upgraded to 180 seat 737-800s, WN could reduce the number of flights, WN could remove 15 flights/day from its schedule.

However, WN carries about 50% connecting traffic on its flights to/from DAL. about 15% is to cities inside the Wright perimeter and then beyond to other WN cities, since WN can ticket beyond the Wright Amendment perimeter cities now but cannot fly there nonstop from DAL.

There is a significant amount of other connecting traffic at DAL between two inside Wright cities such as TUL-LBB that WN shift to other cities in order to free up space for local Metroplex passengers.

If you remove the traffic that WN is carrying to an inside the Wright Amendment city and then carried to an existing WN city, WN could remove another 10 flights/day. You could remove equally as much capacity by removing 75% of Wright to Wright connections.

The actual number of 180 seat aircraft that WN needs to carry its local DAL-current Wright cities is less than half the number of flights they current operate there, or less than 60 flights/day.

I'm not sure how many flights/day WN can realistically push thru DAL with the new facilities but consider that AA's top market from DFW (ORD) has about 800 pax/day but ONLY the top 10 markets have more than 400 pax/day.

IF WN got only half of the passengers in the AA's top 10 markets, carried 80% local traffic with an 80% load factor on 180 seat 737-800s, WN needs less than 30 flights/day which is well within their capabilities.

If they only put 5 flights/day in the top 10 markets and 4 flights/day in the next 10, they could put more than 15,000 seats per day in AA's top markets.

If AA lost even 25% of the local revenue it carries from DFW to its top 20 markets, there would be very obvious damage to AA's finances.

WN is not going to run 20 flights/day to any of the new cities it will serve from DAL but they can easily put more than enough seats in the market to get half of the combined share between DAL and DFW, which is exactly what they have done with MCI and STL.

Add in that the lower fares will reduce AA's revenue in those top markets or result in even more share shift, it isn't hard to see how AA's revenue could fall in the beyond Wright cities as much as it has in DFW-MCI and DFW-STL on a fuel cost adjusted basis.

And again, WN's addition of international flights from HOU will impact both AA and UA from their Texas hubs to Latin America.

Hiding behind the protectionist notion that WN can't inflict any damage because DAL is too small is exactly the type of thinking that AA has used in the past and which has resulted in the loss of so much revenue by AA to other carriers.

The fall of Wright will have a significant and real impact on AA's DFW operations, no matter how you slice it.

 

[FWAAA]

WT: Most WN 737s now feature the (d)Evolve seating which added a row, so most 737s now seat 143, up from 137. WN 738s seat 175, not 180, so their 738s seat just 18% more passengers than their 737s. I don't know how those actual numbers affect your analysis. If business travelers demand frequency, then upgauging planes and reducing frequencies isn't the ideal solution for WN. The other factor is this: We keep hearing from the pro-merger crowd that AA is far too small to keep its corporate contracts or attract any additional contracts. AA, goes the theory, lacks the network. Last I checked, the WN network, while impressive, has a lot of holes. While WN does attract a fair number of business travelers on short routes where they fly many frequencies (like intra-Texas), will WN be able to attract enough corporate contracts in the DFW area to bleed off a large proportion of AA's DFW business-customer base? I don't know, nor do I know how much damage WN will be able to inflict on AA from DAL.

 

[WorldTraveler]

Corporate contracts or not, WN carries almost identical amounts of revenue from DAL to STL and MCI as AA carries from DFW to the same cities - and at comparable fares.
WN carries the vast majority of the traffic from the Metroplex to cities within the Wright perimeter.

WN could probably gain half of the share that AA carries with as little as 3 flights/day on 737-700s in some markets which means more of that potential 90 flights/day could be dedicated to more frequencies in the top 5 markets. Even 8 flights/day such as in markets like LAX and ORD/MDW will have a significant effect on AA - and WN could very well choose to focus on the top 15 markets or top 10 with even higher levels of frequency.

The notion that WN can't compete with DAL for the most valuable traffic and in quantities comparable to or superior to what AA carries from DFW despite DAL's smaller size is simply not supported by facts.

A row of seats one way or the other won't change the facts because if WN only succeeds at gaining 25% of the market in AA's top 20 markets, AA is in deep trouble. Remember, they have 50% of the market from the combined DAL/DFW market to MCI and STL.

Despite the notion that DAL is too small to provide a platform from which WN could serve the top 20 AA markets, WN's schedule at DAL is not at all optimized for the local market nor has WN used every tool it could use to push as much traffic thru the relatively few gates it does have.

The bigger theme is that AA internet fans have repeatedly downplayed the strategic threats that AA faces, only for it to become apparent several years down the road that the alerts I have provided were indeed real.

AA's revenue share in STL has dropped like a rock, AA is not the largest network carrier in any of its former hubs - having lost the local market to competitors. AA's presence in NYC continues to shrink. Multiple sources now validate exactly what I have said for quite some time that AA's Pacific network is losing significant amounts of money, including significantly pulling down AA's performance at LAX where it maintains a lot of domestic capacity to feed its Pacific flights there, even though they lose enormous amounts of money.

AA managed to cut costs esp. from employees over the past couple years in order to regain operational profitability - but still has significant indebtedness and major parts of its network that are losing money.

You are free to believe that WN won't have any impact on AA as Wright falls, as WN expands into Latin America from HOU and as Open Skies allow more competition across Latin America, and that the DL-VS codeshare won't result in any revenue shift but the overwhelming evidence is that each of those initiatives have the potential to significantly affect AA - and combined they could create a "perfect storm" for a series of crises that AA, alone or merged with US, will uniquely face in the industry.

 

[JFK Fleet Service]

.

 

[swamt]

WT is correct. After W/A goes bye-bye, WN will explode in DAL. Currently we have 14-16 RON's, after W/A we will be going to more than double, 39 or more. WN is also planning on as much as up to 250 flts per day out of DAL after W/A. I believe it was FWAAA who has posted doubt that WN will pick up a lot of AA's bus travelers. That's a no-brainer. The MAIN reason WN does not have majority bus travelers than they have is directly tied to the W/A. WN makes too many stops for the bus traveler to use. As the bus traveler does not pay for their tickets they want to get there and get back home ASAP. Once the W/A goes away, WN will in fact pick up a large percentage of bus travelers from AA and DFW. With the close prox of DAL to downtown Dallas, and ALL the new non-stop service that will be added from DAL, WN will be starting an entire NEW advertising campaign for DAL and they will be treating it as a brand new city as most people in the flying public do not have a clue about the W/A and what restrictions have been put in place for SWA to operate out of DAL. We have been told that SWA will spend more advertising Dallas as they have other new cities, and they plan on Dallas becoming and remaining one of the largest stations we have. All you folks out here under estimating the relm of the W/A going away need to look at how many of millions upon millions of dollars AA has spent trying to fight SWA on this issue. They know this will cause them more than that once W/A does go away. It won't happen over night, but it will happen faster than STL, DEN or MCI. Let's not forget the option of WN looking at DFW for some international slots. Due to the restrictions still remaining for international flts from DAL after W/A goes away, WN has been tossing the numbers around on DFW gates. But if I were a betting man I would have to say they would only run international flts so not to have to give up any gates at DAL.
WN still remembers all the times that AA has tried to put SWA out of bus. I wouldn't put it past SWA to really poke AA in the eye-balls. I would also be willing to bet there are other big carriers out there that would be willing to assist with pressure upon AA. No, I don't think AA is over exaggerating the pressures they will receive once the W/A is gone as well as the DAL/VA agreement. That's the big buz of 2014, nobody can wait until it's gone. SWA should be starting the advertising campaign by this yrs 4th quarter, and get really heavy and hard in the 2014 yr as we get closer to the Oct 14 die date. Now, if AA remains a stand alone it will be worse off, but if they do end up merging, then they will be too busy with the merger and the W/A going away will slowly sneak up upon them but it wn't be quite as bad as if they were to remain stand alone with no merger. AA would be better off expecting the worse.