Is USAirways hostile takeover Of AA for Real?

[WorldTraveler]

E,
the issue is not hubs that have been pulled down by network carriers but local markets that have been lost by that carrier.

As you know, all passengers from a network perspective are either local passengers (can make their journey on just one leg) or connecting or through passengers (require two or more legs).
WN built its network around high volume point to point routes which did not require connections while the network carriers, esp. post deregulation, have favored hub and spoke systems. Even in hub and spoke systems 30% or more of passengers are local passengers (to/from the hub).
WN also carries passengers on multi-stop itineraries, without a change of planes - something network carriers generally do not try to do. WN also carries connecting passengers, though to a lesser degree than the network carriers.

Thus, other than to the hub airports, it really doesn't matter where those connecting passengers change planes. If a passenger must fly from ABC to XYZ and must change planes someplace, other than for airport or brand preference, it does not matter where they change planes. There are still tens of thousands of markets (combinations of cities) that can and will only be served by connection - which is why the network carriers serve so many more cities than carriers like WN.

Hubs do create the competitive strength necessary to allow a carrier to be the largest carrier of local passengers in the hub and there is a halo effect on the region around the hub.... ie DL is the largest carrier in most of the cities of Florida, the SE, and in the upper midwest while AA is the largest carrier in many cities of the southwest - due to AA's strength at the DFW hub.

I know you know all that - but I'm developing a line of thought.

What I criticize AA is not that they closed RDU and BNA nearly 2 decades ago since I completely agree that the resources were better used to build up MIA. I don't disagree that STL was a weaker hub (from a local revenue standpoint) than ORD and DFW post 9/11 when alot of capacity had to come out of the system somewhere.

My criticism about AA's hub closures - and US has done much of the same thing - is that they walked away from hubs, allowed low fare carriers to move into markets, and have subsequently lost those local markets - and sometimes the regions too - not only to a low fare carrier but in many cases also another network carrier.

The reason why AA's revenue generation ability is at a crossroads and why their competitive outlook is so much at risk is because they have not defened their former hub markets - and outside of the southwest and Latin America - AA is not the dominant carrier in huge swaths of its network. Other carriers have done a far better job of defending their former hubs and the local markets around them even after the hub has been pulled down.
No carrier is so far strong in all parts of their network - and that in part is why consolidation is still likely attractive to some carriers and why it will also yield some consumer benefits - since strength in a region does translate into stronger service.

When AA says that their network strategy is based around five cities - only two of which they are the dominant carrier and in the largest market in the US, NYC, AA is #3, alot of people, and I suspect the creditors have a hard time wondering how AA is going to succeed long-term.
And despite Parker's claims about how strong AA-US will be, they still do not grow their presence in many key markets to levels strong enough to be the dominant carrier - which is clearly shown to translate into the ability to win the highest value revenue. AA/US would be #1 in the same markets where AA or US are already #1 but doesn't move the combined entities strength enough in markets where AA or US is not #1 or #2 to help it effectively compete with larger carriers. And among those regions is continental Europe - which is still far larger than the UK - and Asia, which is a larger region than Latin America.

Understanding the challenge that AA/US individually or together have is necessary in order to evaluate the likely success of the business plans each would have individually or jointly.

 

[wings396]

The only Hub that US lost to a low cost carrier would be
BWI, which was doomed due to PHL anyway. I can't really say that PIT was either since SWA didn't really go gangbusters there as many predicted. As far as DAY & SYR go, nobody took over there to my knowledge.
LAS was a half hearted effort as a hub with a bunch of low yield leisure travel. I know that you are going to bring LGA into the mix, and I stand firm on my belief that the swap deal there was done with the AA merger effort.

 

[eolesen]

The only Hub that US lost to a low cost carrier would be
BWI, which was doomed due to PHL anyway. I can't really say that PIT was either since SWA didn't really go gangbusters there as many predicted. As far as DAY & SYR go, nobody took over there to my knowledge.
LAS was a half hearted effort as a hub with a bunch of low yield leisure travel. I know that you are going to bring LGA into the mix, and I stand firm on my belief that the swap deal there was done with the AA merger effort.

No, you lost LAS to WN... I'll pull the numbers later to show their build-up and US/HP's decline...

LGA? Not what I'd call a hub, since it was largely point to point, and any connections were an afterthought....

Discussion on the slot deal with DL was started two or three years before AA filed for Ch.11, so trying to spin that as part of the merger prophesy is a bit of a stretch.

 

[eolesen]

Pretty clear growth curve for WN -- in just 4 years, they eclipsed HP at LAS in terms of departures, and in ten years, matched them in terms of markets... My historical data only goes up to 2003 at the moment, so I can't show the pull down.

1991   city    Markets  flights
----   ------- -------- -----------
WN     LAS     8        49
HP     LAS     32       111

1995   city    Markets  flights
----   ------- -------- -----------
WN     LAS     16       117
HP     LAS     39       98

1999   city    Markets  flights
----   ------- -------- -----------
WN     LAS     26       121
HP     LAS     37       101

2001   city    Markets  flights
----   ------- -------- -----------
WN     LAS     38       140
HP     LAS     33       102


2003   city    Markets  flights
----   ------- -------- -----------
WN     LAS     38       162
HP     LAS     39       91

 

[PITbull]

The measure of whether consolidation is good for the consumer or not is whether airlines become far more profitable than average American companies, whether airline employees and executives become far better compensated than other industries, and whether service deteriorates as a result of the consolidated marketplace.

So far, none of those factors is anywhere close to happening and based on some of the structural issues which airlines have to face, I doubt if they ever will happen.

While it is nice to think that executives of a public company - of which all US major airlines are - can benefit dramatically is just not even close to reality.
The top executives at any of the US airlines combined do not make more than a fraction of a percent of the total costs of that airline. The vast majority of even management are people who could easily make more money elsewhere - as could the executives themselves.

I'm not defending their salaries; I'm just saying what they make won't change the finances of the company one iota.


The DOT/DOJ will measure a potential AA/US merger on the basis of what antitrust rules and the standards that have been applied to other recent mergers - that is the basis of case law, of which antitrust regulation is related.

We don't disagree that it will be essentially AA employees who will have to decide if they are really going to obtain their best outcome from a US merger, an AA standalone plan, or something else... and for the most part the media has basically considered the only options are one of the first two. I submit that there are alot of other valid options that AA's creditors and employees need to consider.

Consolidation is what normally happens in a "free enterprise" system. I am only speaking to how consolidation in a transportation market, which is a vital part of U.S. commerce, can hurt the consumer in the form of much higher prices for air fare as well as other services offered by the airlines.

You see the consolidation process happening in many industries and markets, e.g., telecommunications,pharmacy chains, cable, fast food franchise, food chains, hotels, automakers, etc.Its bound to happen and occurs quite frequently. For example, in my area, we had a few grocery chains, and prices were higher than other areas that were tens of miles away. I would travel those many miles to get things like produce, and meats that were cheaper . Then a another large grocery chain started popping up all over my area within a one mile radius, and suburb areas. The two grocery stores competed fiercely for your business because of the new competition and would offer fuel perks and such to the consumer if you bought groceries from their store instead of the competitor. They even would advertise that they take ALL competitors coupons. Some of the prices for certain foods wwere so inexpensive that I thought how can they make money? The idea is to last long enough at these low prices and run the new grocery stores out of business. If they do close, then prices will start to climb back up as before. And the consumer, once again will be paying those high prices for the same groceries that are cheap now.

As , I indicated in my previous posts which may need more clarity... it can prove very costly to the consumer when there is less compitition for the same goods and services, specifically when demand is high.

You know this better than most that where there is plenty of competition, prices are competitive and the consumer has more choices. When there were 7 and 8 legacy carriers, besides having more consumer choices and better fare pricing, there was much more employment which was much better for the overall economy.


With regard to the US/AA proposed merger, there will be obviously less competition in many markets for the consumer and less choices.The more consolidation occurs, the less competitive features there are to keep ticket prices fairly inexpensive. The smaller carriers in these monopolized markets will not be able to compete for very long, and will eventually either pull out ,get gobbled up, or go out of business.

 

[wings396]

The only Hub that US lost to a low cost carrier would be
BWI, which was doomed due to PHL anyway. I can't really say that PIT was either since SWA didn't really go gangbusters there as many predicted. As far as DAY & SYR go, nobody took over there to my knowledge.
LAS was a half hearted effort as a hub with a bunch of low yield leisure travel. I know that you are going to bring LGA into the mix, and I stand firm on my belief that the swap deal there was done with the AA merger effort.

 

[wings396]

Sorry for the dupe post, I don't disagree about LAS, just didn't consider it as much of a hub. Even though the slot swap was put into motion a while ago, I still believe Parker was setting the table for a merger. Everyone pretty much knew it was just a matter of time before AA filed....

 

[FWAAA]

Sorry for the dupe post, I don't disagree about LAS, just didn't consider it as much of a hub. Even though the slot swap was put into motion a while ago, I still believe Parker was setting the table for a merger. Everyone pretty much knew it was just a matter of time before AA filed....

I've posted this before, so if it's a repeat to you, I apologize. If Parker had not traded away all those US LGA slots for the 42 magic beans (DCA slots), then a merger of US and AA would have made AA the dominant LGA carrier when you add the AA LGA slots plus all the slots held by US before it gave them away to DL.

AA has a fair number of DCA slots and when you add them to the US slots before the DL deal, the combined airline would have almost the same presence as US does now.

Because of the government's demands that US and DL divest some slots at LGA and DCA, it's clear that US holds the limit on DCA slots and that the AA DCA slots will have to be given up when US and AA merge, so basically, US gained nothing at DCA once it merges with AA. Up in NYC, the combined airline's slots at LGA will still be substantially fewer than Delta's LGA portfolio. But if Parker had not given them away, the combined airline would have about the same percentage as DL does now. Perhaps US-AA would have had to give up some LGA slots to get to about 50% of the LGA total.

Bottom line: A combined US-AA will be weaker at LGA than if the slot deal had not happened and will be no stronger at DCA than if Parker had waited to get AA's DCA slots. If Parker really did that with a view toward merging with AA, then why the hell did he give away so many valuable LGA slots for so few DCA slots? His slot giveaway guaranteed that even with a merger with AA, the combined airline will still be smaller at LGA than DL. Was that really his plan?

 

[eolesen]

^^^ What he said ^^^

 

[wings396]

Since I'm not in the know, I have no idea. Possibly at some point we will know his true reasoning....
While you can't believe everything the company claims, at this point they claim that the DCA expansion is paying off......

 

[eolesen]

While you can't believe everything the company claims, at this point they claim that the DCA expansion is paying off......

Yes, and I believe Obama recently said our economy is doing fine...

 

[WorldTraveler]

The only Hub that US lost to a low cost carrier would be
BWI, which was doomed due to PHL anyway. I can't really say that PIT was either since SWA didn't really go gangbusters there as many predicted. As far as DAY & SYR go, nobody took over there to my knowledge.

US is the product of a bunch of mergers of small airlines that were highly regionalized… it isn’t surprising that the plethora of “hubs” that were operated couldn’t be sustained since in reality they were merely large focus cities that were turned into hubs post-deregulation and then US realized it couldn’t defend and didn’t need all of that connecting capacity.

Consolidation is what normally happens in a "free enterprise" system. I am only speaking to how consolidation in a transportation market, which is a vital part of U.S. commerce, can hurt the consumer in the form of much higher prices for air fare as well as other services offered by the airlines.

You see the consolidation process happening in many industries and markets, e.g., telecommunications,pharmacy chains, cable, fast food franchise, food chains, hotels, automakers, etc.Its bound to happen and occurs quite frequently. For example, in my area, we had a few grocery chains, and prices were higher than other areas that were tens of miles away. I would travel those many miles to get things like produce, and meats that were cheaper . Then a another large grocery chain started popping up all over my area within a one mile radius, and suburb areas. The two grocery stores competed fiercely for your business because of the new competition and would offer fuel perks and such to the consumer if you bought groceries from their store instead of the competitor. They even would advertise that they take ALL competitors coupons. Some of the prices for certain foods wwere so inexpensive that I thought how can they make money? The idea is to last long enough at these low prices and run the new grocery stores out of business. If they do close, then prices will start to climb back up as before. And the consumer, once again will be paying those high prices for the same groceries that are cheap now.

As , I indicated in my previous posts which may need more clarity... it can prove very costly to the consumer when there is less compitition for the same goods and services, specifically when demand is high.

You know this better than most that where there is plenty of competition, prices are competitive and the consumer has more choices. When there were 7 and 8 legacy carriers, besides having more consumer choices and better fare pricing, there was much more employment which was much better for the overall economy.


With regard to the US/AA proposed merger, there will be obviously less competition in many markets for the consumer and less choices.The more consolidation occurs, the less competitive features there are to keep ticket prices fairly inexpensive. The smaller carriers in these monopolized markets will not be able to compete for very long, and will eventually either pull out ,get gobbled up, or go out of business.

Pit,
The US government which is one of the most aggressive in pushing free market capitalism to its limits does not find covering costs and generating an acceptable level of return as abuse of the consumer.
Airlines have YET to consistently even cover their costs let alone generate acceptable levels of return in line with other industries.
Prices likely will go up – but it doesn’t mean it is predatory if airlines are able to force up prices.
The US government carefully limits the ability of companies to cooperate in order to force up prices but you will probably be surprised to know that many countries allow coordinated pricing at various levels in various industries.
The US government becomes concerned when companies of the same industry act together to control a market or when new competitors do not have access to markets.
That is why nearly all of the focus of the DOT and DOJ in airline mergers has been around markets size in restricted access markets ie those that are slot controlled or have limited facilities for new entrants.
I get that you don’t want to see AA-US and on that point we agree. Arguing against it on the basis of that will be bad for the consumer won’t fly. If AA-US doesn’t happen, it will be because other options will be put forth that are better for one or more of the parties that will determine one or both – and probably AA.

I've posted this before, so if it's a repeat to you, I apologize. If Parker had not traded away all those
Bottom line: A combined US-AA will be weaker at LGA than if the slot deal had not happened and will be no stronger at DCA than if Parker had waited to get AA's DCA slots. If Parker really did that with a view toward merging with AA, then why the hell did he give away so many valuable LGA slots for so few DCA slots? His slot giveaway guaranteed that even with a merger with AA, the combined airline will still be smaller at LGA than DL. Was that really his plan?

Whether the stars are aligned or it just makes sense, there is no disagreement between me and at least 2 other people about this point.
More significantly, DL convinced US that the deal was fair or at least that US can’t find a better deal.
DL was also clearly considering the possibility that US might merge and created a situation precisely as FWA outlined – that US could merger w/ someone but they are going to have to divest slots at DCA – something far too many people want to say is an issue for DL should it be interested in a deal with AA but something that apparently shouldn’t be an issue for US.

Since I'm not in the know, I have no idea. Possibly at some point we will know his true reasoning....
While you can't believe everything the company claims, at this point they claim that the DCA expansion is paying off......

I’m sure the DCA expansion is working for US… the real question is why they couldn’t make those slots work or develop a schedule necessary to create what DL has done.
And it also doesn’t change that US has further marginalized itself in NYC and in many markets now that DL is operating nonstop service from LGA to many of US’ key markets including a number of cities in the Carolinas which is the heart of US’ route system because NYC is the top O&D market from most cities in the eastern US. Even seat maps on many DL flights LGA-CLT are full – and they often times deceptively understate how full flights are.
Even if AA and US merged, they still wouldn’t regain the mass necessary to serve all of the markets that DL serves from LGA.
NYC is not the only market that matters but if you serve NYC plus a whole lot of other markets that matter and are larger in all of them, it makes it a whole lot harder for competitors to gain an advantage.

 

[johnny kat]

My guesstimate is all things considered the LGA/DCA slot swap deal is a wash for both DL and US. The yields are considerably better out of the DCA market for US. Plus it has removed the anti competitive cries always heard when US was involved in merger talks with any other airline.

As for LGA, with the competitive environment in place I doubt very seriously DL is enjoying huge profits because of the low yield leisure market in and out of NYC. For all of the hard work DL is doing in the New York market there is a reason US thought better and that is there is just too much competition in NYC.

Price is the only loyalty driver in the airline industry and DL will never command the yields out of LGA that US can out of DCA while expending less costly resources, ie....more efficient airplanes.

DL out of New York is demonstrating why bigger isn't always better.

 

[WorldTraveler]

problem w/ your theory, Kat, is it isn't supported by reality.

DL received higher average fares from LGA than US does from DCA based on current data - which was in effect before the slot swap went into effect. And US had a higher percentage of DCA traffic before the slot swap than DL had at DCA.

Even before the slot swap, DL's revenue at LGA was more than US' at DCA.

this part of your statement is correct, though....

there is a reason US thought better and that is there is just too much competition in NYC.

and is supported by the fact that US couldn't compete in NYC against AA, B6, DL, CO/UA, all of which were larger than US.

And in addition, DL's presence in NYC because it is the largest airline in terms of revenue at both LGA and JFK means they are able to serve all of the market while US in WAS only has part of the domestic market - and splits the international market and the rest of the domestic market w/ other carriers.

DL's local revenue at LGA and JFK combined (not even counting revenue that connects over LGA or JFK) is almost twice as much as US' revenue at PHL and 3X as much as at CLT.

NYC is a huge LOCAL market and DL, like CO before, and now UA recognize the value of having the size necessary to get a big chunk of those revenues.

 

[johnny kat]

WT, you have indeed laid out the reasons US needs a merger with AA. All of the disadvantages you have pointed out for US in the NYC market would be adequately solved with a merger of US and AA (which may explain why many on this board are so adamantly opposed to a merger). If a merger does not occur then the LGA and JFK markets will become even more fragmented resulting in DL, the high cost carrier, being forced into filling seats at a loss.

It could be argued that a US/AA combination would benefit DL by stabilizing many large markets that would otherwise be influx and under invasion by any number of smaller regional airlines. If the remainder of US very valuable slots at slot controlled airports were to be purchased by WN or UA then DL may very well be facing a bigger threat than just US/AA.

If AA and B6 combine that is a big problem for DL in the NYC market. If US is purchased by UA then it is a much larger problem for DL in NYC. There are any number of combinations that could be discussed as competitive responses in NYC. But it is foolish to think that DL will control LGA and JFK for very long under any circumstance.

So once again, the biggest question concerning the end game of deregulation is "What is the solution to the USAir situation?"