JUSTICE DEPT SUES TO BLOCK US/AA MERGER

[ContUNITEus]

It kind'a reminds me of what my dad told me once - that if I ever got caught speeding, and I try to say, "but everyone else was speeding too," that this would not be a smart thing to say to the cop. I truly hope that US Airways' and AA's attorneys are not that stupid that they would say "but you let them do it, and didn't stop them." But of course they are that stupid. What else is their argument going to be?

 

[WorldTraveler]

let's also remember that the economic environment changed dramatically between when DL/NW was approved (the first of this round of mergers) and now.... financial markets tanked just after DL/NW was announced and fuel prices have also spiked.
There was undoubtedly a lack of diligence on the part of the DOJ but the airline industry has had multiple mergers over many years with little real effect on pricing - until now. They could not have necessarily seen what this round of mergers would do nor would they have known until several years into the mergers.

A lot of the capacity that has been pulled has been the result of increased fuel prices that have cut demand. As much as the DOJ wants to rail against the effects of reduced service post merger, they cannot ignore the fact that fuel is the highest cost for airlines and it has increased dramatically. AA/US have to include very detailed macro-demand models to show that.

The mere fact that WN which is supposed to be the low fare leader pulled out of a number of FL cities says the economics of mergers are not what they are sold by even the low fare carriers - and the DOJ will certainly consider that.

Yes, swamt, it could get really interesting if WN decides it is worth their while to venture over to DFW. I would be a little surprised if they open a station based just on int'l flights but WN would have no problem finding 8-10 int'l flights/day to fill a gate.
And it is also not foreign thinking for WN to look for yet one more opportunity to expand its influence in N. Texas.

 

[TWU informer]

Whatever happened to supply and demand dictates competition and who survives? Instead we have government bailouts, then bankruptcy laws that prevent the weak from ever going out, and now when mergers are attempted, the same government stomps on that avenue to survive. Unreal! Socialist Pigs in a Capitalist Society ruining the Country.

 

[PullUp]

Ok, thanks for the elucidation.
Next point: The DOJ claims that 'going forward' both carriers are viable.
Ahem. Just recently did ANY airline produce a profit. Profits are not bad, they are good. Stability and safety immediately come to mind, along with increased tax revenue for the guvmt. (Except for ancilliary fees, which is a whole 'nother topic).
As soon as a few very short years ago, LCC was out borrowing $$ to stay afloat due to 150bbl oil.
And, believe it or not, AA is in bankruptcy (means you can't sustain your business using the current model).
"Going forward' unmerged might produce fragmentation, shrinkage, or a loss of thousands of jobs if a failure occurs.
DOJ is in effect forcing LCC and AA to become discount fare leaders: undercutting fares to gain market share because they cannot compete with UAL and DAL in size, convenience, or FF programs.
Also, if fragmentation were to happen, who will pick up the pieces? UAL or DAL? Aren't they already big enough? JetBlue, Spirit, Alaska, Alliegiant, Virgin Am, and Frontier don't have the network to feed SA, Europe, or the orient.
So, what is 'Plan B' looking like for AA and LCC? What does the DOJ see in it's crystal ball for the future of these two airlines?
If a merger is out, is a domestic codeshare agreement out of the question?
How about LCC buys JetBlue instead and expands on the AA market-sharing agreement in place there?
Any ideas?

 

[Jacobin777]

I have no idea where you come up with your statistics for SFO traffic but, not surprisingly, your AA numbers are exactly what I see but your DL numbers are a couple hundred thousand passengers short.
Perhaps SFO’s official traffic report will provide a little clarity. You would think they know who boards passengers, wouldn’t you? They say:
Airline Market Share at SFO
46% United Airlines
9% Virgin America
8% (tie) Delta, Southwest/AirTran - See more at: http://www.flysfo.co...h.PG1zO7Ha.dpuf

Hmmm… maybe AA’s really not larger than DL at SFO.

I find it interesting that you provided SFO's link which gives approximations while I gave exact numbers.

It also stands to reason if my AA numbers are correct (which you've admitted to) then my DL numbers are probably correct as well as I've pulled them from the same sources.

Regardless who's bigger, both are much smaller than UA @SFO and aren't going to make a full "assault" at SFO anytime soon either.

DL's focus is more at LAX and SEA (apropos, is ending its SEA-KIX route permenantly).

Yes, I’ve said before that AA has enough slots to make NYC work but for some reason they continue to lose share to DL and B6. The issue is clearly not a lack of slots but AA’s ability to compete.

This issue is cleary that AA had a poor cost structure and due to contractual issues, couldn't fly the proper planes on a number of routes.

ORD is the best example of where not having the proper plane forced AA to downscale ops. I expect JFK and ORD to improve ops much more the next few years.

B6 has been farely stagnant @JFK since 2008. Ostensibly, it seems to be focused more at other cities such as BOS, etc.

I’m sure you and others will argue that the strategy will work but you need only look at the successful LCCs like WN and AS to realize they buy what they can afford without taking on significant amounts of debt.

WN and AS are completely different models. Why bring them up?

That is the strategy that DL is following. I am as certain as the day is long that there will be a significantly positively difference in DL’s financial health a few years from now compared to AA and UA that can be directly attributable to DL’s decision to not spend money on airplanes as if Boeing and Airbus were shutting their doors tomorrow.

I’ve been hanging around this board for 10 years already… I can wait five more to see if I am right on this or not.

Good, then we'll see what happens in the next few years.

IIRC, you've already lost a $50 (or was it $100?) bet about UA and CO merging. IIRC, the merger didn't happen the year specified but a year or two later.

You, sir, have shiny jet syndrome – a aviation disease that is characterized by the notion that a machine can solve any problem.
AA lost a whole lot of ground in NYC and it is simply wishful thinking that they will regain it.

LOL. That was a good one. I've never stated anywhere new jets=profitability. I've stated new jets + new cost structure = competitive (and probably profitable) stand alone AA.

Do you realize that over the past 10 years, AA and UA have basically traded places in ORD international with respect to size? Ten years ago, AA outboarded UA in international passenger with 40% of the local int’l market compared to 33% for UA. Now the numbers have reversed but more significantly, UA’s international revenues have grown much faster than AA’s which means the revenue gap between AA and UA is much larger than it was before.
Yes, AA loyalist, AA has lost a lot of ground in NYC and ORD in the international arena and in LAX they are holding their own only by operating two heavily money-losing routes.

Where do you get your numbers from? UA has always dominated ORD. That's almost considered "common knowledge".

Mainline UA/AA

UA:

2002: International:1,230,593
2012: International:1,362,807

AA:

2002: International: 991,588
2012: International: 869,261


SourceOT

 

[Jacobin777]

And other carriers are engaged in refleeting as well including DL. DL just happened to stop at 100 new mainline narrowbodies instead of 450 or so for AA. DL’s getting the rest used at much lower prices but very similar operating costs.

Are you saying the operating costs of a MadDog 80 to an B738 as being "similar"? You have got to be kidding.


Many times financing costs for purchasing new planes are just as good as purchasing used, old and inefficient aircraft.

Other carriers are refleeting too, including WN using lower CASM aircraft. Thus, the difference in operating gains for AA because of its new fleet will be minimal and those gains will be wiped out by the higher ownership costs.

We aren't comparing WN in this disussion. Why not compare it to a carrier such as DL?

If you think that AA’s labor situation is so spotless, may I remind you what happened just under a year ago… in a move that did wonders to help DL increase its revenue share. Did you happen to notice that DL’s corporate revenue gains increased in the quarters following the labor events of last fall? Given that UA had their own operational meltdowns and AA had labor issues, corporate contracts were looking for someone who could help them get their employees where they needed to be with some reliability. It didn’t hurt that DL had just added 125 new flights at LGA, one of the most corporate contracted concentrated airports in the US.

Who said AA's labor situation is "spotless"? I never said that anywhere (please point that out where I've stated as such). I've stated that even if Horton was (probably is now) to remain at the helm of AA, I don't expect to see too much industrial action by various unions. Many already know that Horton isnt responsible for the merger to collapse. I've also stated that I (along with otehrs) find AA's FAs to be just fine and that F/A attitude isn't probably going to stop me and millions of others from flying on AA.

If this merger really forces AA labor back into the arms of the management AA labor was running from, you might want to be very careful about any assessments of how great labor relations are at AA.

AA management and labor have already hammered out an agreement prior to Parker's b.s. lollipops.

Again, without being too tautological, it will take a few years before we see how all this pans out-assuming that Horton runs the show. If Parker and his team run the show then I would have to re-evaluate the situation.

 

[WorldTraveler]

Thanks for your replies, Jacobin.

Do you think SFO dropped AA from the list despite listing DL and WN as tied? AA didn’t make SFO’s list of the top 3 rankings because they are smaller than UA, VX, and DL and WN. Period.

I never argued that DL or anyone else was going to take down UA in SFO; you mentioned SFO only because you said AA was larger than DL there yet they clearly are not.

I’m not sure what difference it really means to this merger anyway. AA/US based on CURRENT size of both carriers would be larger than DL assuming DL doesn’t grow but with the DOJ lawsuit in place, it is far from clear what will happen and when.

Shall we also mention that AA is reducing some of its Tokyo flights to less than daily and UA is downgrading its KIX service? Could it be that the Japanese gov’t’s policy of devaluating the yen is having significant effects on airline travel and even if Asia is strategically important to AA, they can’t sustain the level of losses that will occur in the winter. KIX is not near as strategically important as Japan is overall and DL is holding its own quite well in the overall market.

The reason to look at LCCs is because they have figured out to make their finances work, something the legacy airlines have struggled for decades of deregulation to be able to do. You can dismiss WN’s balance sheet but it provides strength that they use to do things that AA simply cannot. Likewise, DL is achieving some of that same financial strength relative to other network carriers that is allowing them to competitively take on battles that other carriers have not dared to do. Their entire NYC strategy didn’t come cheap – launching 125 new flights over a couple months – yet DL did it and is clearly capable of supporting large internal growth initiatives. Relative to the west coast and other regions where DL needs to grow (including to Latin America), it says DL has the resources and financial strength to internally grow and take on well-established rivals. Note that UA touted how much larger the merger would make it but in the most recent month UA had shrunk enough to allow DL to be slightly larger; UA is also pulling back in some key west coast-Pacific markets including NRT and SYD where DL stands to gain. All the hyperbole about what will be done before a deal has to face reality after the merger, usually a couple years later. AA/US, with or without the merger will not be as large as you and others think they will be simply because there is too much unprofitable flying in their network which they have not dealt with.

BTW, did you happen to notice that a veteran industry analyst commented about AA’s financial problems at LAX? Holly Hegeman picked it up and it is posted on the US forum… but it has been said elsewhere. I’m not the first one to recognize that AA is doing a lot of money-losing flying to hold onto market share.

I have no doubt that AA will benefit from larger regional jets. I’ve never said they wouldn’t. I have doubted and still do that they can operate as many mainline flights as they have PLUS add the large regional jets.

And my point still remains that larger regional jets don’t fix the revenue problem. IF the revenue was there, AA could fly them on their existing aircraft. The new fleet will be cheaper to operate but they don’t generate revenues that AA couldn’t get otherwise. AA has 2 class 70 seaters already and they also have mainline aircraft they could use to go after the revenue if it was really there.

And there is no scenario that a current generation or even one generation old aircraft is cheaper new than used. If so, please show me a real life example of a fleet type. AA is taking on enormous debt in order to reduce operational costs in the short term while other carriers including AA, B6, DL, and WN among others are also adding lower CASM aircraft but doing so without taking on near as much debt. UA is also taking on huge amounts of debt for fleet renewal and will be parking older aircraft very aggressively as well. DL has already said they expect to pay for their 100 fleet order of 739ERs without increasing their debt levels; the M90s are being bought used for cash while the 717s are on leases that DL is expected to buy out when they can. AA can’t possibly say their balance sheet won’t be hit by their fleet renewal – and neither can UA.

As much as it kills you to admit it, AA is investing tens of billions of dollars in fleet renewal and will get very little real operational cost advantage relative to its peers.

The ORD comparison is about the LOCAL market, not the flow traffic that AA has carried. AA’s share of the AA local international market has dropped dramatically over the past 10 years. AA did indeed carry more of the local ORD international market just ten years ago. UA’s BK and restructuring was very long and painful and UA did lose a lot of revenue and market share in many of its key markets including ORD and AA benefitted from it. The pendulum is now swinging the other way and there are no indications that UA is going to give up what it has regained.

The issue about labor is not that they blame Horton but that they have a very bitter taste in their mouth period and no one realistically expects that AA mgmt will be able to avoid further cuts if they remain as a standalone. Go read what Holly said if you think I am making it up. AA’s unions chose Parker because he presented a business case that involved less cuts for AA labor and also allowed US employees to benefit; of course both sides were excited about that prospect but it has yet to be shown that the promises were viable. Without the merger, AA mgmt would likely be right back with a plan that isn’t built on promises to labor that can’t be kept.

Quite simply, AA lost a lot of competitive ground over the past 10 years because of their incomplete and drawn out restructuring which is still not finished. You and others expected they would waltz into BK and come out having regained all that they lost even though evidence was strongly against AA’s growth plan. Then AA succumbed to Parker’s merger romances and others, sometimes the same people, argued that AA would regain its dominant position even though AA didn’t have the strength in key markets like Asia and won’t, merger or not. US simply did not have the level of revenue quality that AA, DL, and UA have and thus their network couldn’t be put together with AA’s to yield as large of a network as many thought they would have. Further, I have repeatedly said that the combined AA/US won’t be as large as the combination of the two either because of divestitures or because reducing capacity is the only way to make the economics of a merger work. Now it appears that AA/US will likely have to either divest a great deal AND reduce capacity as a merged company OR fight it out as a standalone which will involve reducing some of the underperforming capacity which AA has still not dealt with and which is unsustainable for the long term. There is no easy fix for AA’s competitive position; planes won’t fix it, a merger won’t fix it, and AA’s competitors aren’t going to stand by while AA works to restore what it lost. They are all moving forward with plans to grow, including in AA’s key markets.

This is truly make or break time for AA after 10 years and the DOJ’s actions don’t make it any easier. But to somehow think that AA is going to come out swinging again tomorrow was a stretch 10 years ago and it is still a stretch today. One day, perhaps.

 

[Hatu]

Pretty good discussion on the topic:

http://www.bloomberg.com/video/is-the-amr-us-air-merger-grounded-for-good-9xXmvZ2BTFKzxLdqAz5jjA.html?cmpid=yhoo

 

[AANOTOK]

Pretty good discussion on the topic:

http://www.bloomberg...html?cmpid=yhoo

E, FWAAA, WT...you have the floor!

 

[N288AA]

Hey folks simply put.....WE WON"T WORK FOR HORTON!

 

[WorldTraveler]

E, FWAAA, WT...you have the floor!

this was just another discussion including plenty of biased opinions along with the oft-heard "since the other 3 megamergers got approved so why did we get screwed?"
And they continue to miss that AA/US' network is not the same as DL/NW's or UA/CO's or FL/WN's.... AA/US is much more densely concentrated on the east coast than any of the other three which creates market concentration issues which the others did not. The mere fact that AA/US will have a minimal presence in Asia and a smaller presence in Europe and west of the Rockies than either DL or UA should provide plenty of evidence that AA/US is a much more concentrated merger than the others... but no one seems to want to hear that.

It was interesting to note that one of the people on the video noted that the legacy carriers have never covered their cost of capital and the merger should be approved to allow profits sufficient to cover those costs. Yet AA still has the largest aircraft order in history on its books. No one has asked if the problem is the legacy carrier model itself which is based on retiring aircraft at 20 years or before (on average). No one has asked if AA's disdain for fleet commonality and used aircraft from other operators is part of the problem. WN decided it was worth their while to buy used 737s from other carriers; DL has and is acquiring hundreds of aircraft from other operators.

As long as the bias is that the way the legacy carriers have operated should permit them to push fares up, then there will always be people who will point out that there are other carriers who do not buy that logic and show decidedly different results because of it.

As for the merger in general, continuing to develop outcomes based on one's bias is a guaranteed formula for being proven wrong.

Whether the DOJ will have to concede some of its accusations are not fully provable or not, they likely have more than enough evidence on at least some of the accusations they have made to either force a lengthy legal process or for AA and US to negotiate very seriously.

The likelihood that AA/US will proceed w/o significant divestitures is very, very slim.
And it is likely that the DOJ told them that before the DOJ's objections went public but AA/US decided to push it into the legal arena anyway.

Jacobin,
this might give you some idea about the potential for labor issues.

Hey folks simply put.....WE WON"T WORK FOR HORTON!

 

[robbedagain]

wt you forget that aa is actually stronger in the midwest and the west whereas us is stronger in the east... yes aa has sizeable ops from mia to bos but i do believe theyre strongholds are in the midwest and west as well as latin america

 

[WorldTraveler]

based on DOT boarding data and Midwest including the states of ND, SD, MN, WI, IL, NE, KS, MO, IA, IN, OH, and MI, carrier rankings by boarding for 2012 are DL with 29M pax, UA with 21M, WN/FL with 20, AA with 14, and US with 5.

AA/US would dramatically be stronger on the east coast and in the southwest and it is their concentration in limited access markets like DCA but also in markets on the east coast where their combined strength between those regions is problematic and why the DOJ said what they did.

The notion that a carrier can have 80+% share of a market is no longer valid if there is no meaningful low fare carrier competition... DFW-CLT and other AA/US strength markets in the SE/E to AA strength markets in the west/southwest is exactly what concerns the DOJ.

 

[Bob Owens]

wt you forget that aa is actually stronger in the midwest and the west whereas us is stronger in the east... yes aa has sizeable ops from mia to bos but i do believe theyre strongholds are in the midwest and west as well as latin america

Yes but they make their money out of NY and MIA. I find it amusing how the Media jumped into this game of saying that AA has no plan B, what they seem to forget is the Merger was plan B. The company's Plan A which they presented in court would have, according to their claims, produced a company with around $3 billion a year in profits, and the equity stake that we were getting under their plan A, according to the testimony of their lawyers, would have netted us enough to make up for the 20% we were to give up. Now less than a year later, the media, and others, seem to have forgotten all that. The company had to have a plan in order to ask the court to abrogate contracts, its not where the company simply gets to wipe out all the contracts then make a plan, they have to convince the court that in order for the plan to succeed that the changes they seek to the terms are necessary, all this happened months before the Merger announcement. Did management and the board lie to the court? In the short term this merger will be a disaster for all workers in this industry, to give a carrier the dual advantages of size and super low labor rates will put downward pressure on wages across the industry. On the one hand eliminating US would bump up our mid term wage adjustment, but on the other hand UA and DL will tell their workers that they have to compete with the much larger AA. I would rather not see this merger happen, that's why I feel that in the end , after a delay, it will happen.

 

[737823]

Bob,
In your meetings with AA/US management how much of the so called "synergies" their consultants believe this transaction will produce will be given to employees? It seems to me that if US won't treat their current employees very well and supposedly refuse to negotiate with the IAM why would they treat the combined group any differently?

Josh