U.S. government, two airlines say open to settling merger fight

[Phoenix]

Im sorry but that pic reminds me of the late MJ, King of Pop.

 

[WorldTraveler]

will the cost offset the potential synergy payday?

The day the DOJ announced the lawsuit – and it was known it was coming by AA and US execs before that day – the equation changed from “is the cost of a settlement worth it?” to “by how much can we reduce the DOJ’s “ask” if we keep fighting.”
It is also abundantly clear by the action of AA’s creditors that they recognize AA can’t compete long-term as a standalone (again, they are behind DL, UA, WN, and US east of the Miss. and #3 in the Midwest) and thus need US. Thus, continuing to ask if the price is worth it is not longer a valid question. The creditors and US both crossed that line when the merger was announced and the decision was reinforced the day they said they would fight the DOJ.

DCA is definitely their target. The DOJ wants "Its cake, and eat it, too." They will force AA/US to give up slots, while guaranteeing some level of service to smaller communities with the slots they have left. IOW, the DOJ wants to force the New AA into an profitless situation at the DCA "hub." Parker would then need to decide if the New AA could handle DCA as a "loss leader," and hope the rest of the rest of the system could subsidize the small-city service to/from DCA.

Again, US constructed the slot deal such that they had no ability to grow at DCA. US gained what it wanted at DCA but still had a strategic shortcoming in the rest of the country.
How unprofitable new AA becomes at DCA depends on how much service any one carrier adds to other hubs. US got lucky with the B6 slot purchase post slot swaps because B6 put most of their slots into one market which trashed that but restricted the damage to one market since BOS is a very poor hub for connectivity.
Slot divestitures won’t happen that way again. WN will get a chunk of slots and they will use them to feed their largest hubs/focus cities where the impact will be greatest. WN knows this might be the last big chance to have an impact.

And it is also very possible that Parker could choose to divest most heavily from the small city slots. They are not going to be the focus of deep fare discounting by a new carrier while slots that are transferred to low cost carriers are going to have a far larger impact on the profitability of the rest of US’ operation; IOW dumping a small city slot will have far less adverse effect on new AA.
The downside is that DL is the carrier that would most likely benefit from divestiture of small city slots – and that is precisely why Parker is trying to fight it. Small city/RJ slots are basically the interest of the big 3 network carriers; UA could serve some of the cities but some are already served from IAD which limits their ability to compete.

The small city slots are not going to generate any real money to AA/US because the market is one of two airlines and the markets are being served for political reasons and not because they can support high slot prices.

If Parker was smart, he’d swallow his pride and divest of RJ slots most heavily, even if DL ends up being the winner and limit the number of large slots – less than 10 would be ideal – to minimize the impact on the rest of the large city operation at DCA.

The counter intuitive argument is that by not allowing the merger, there will a de facto duopoly between DL and UA as their size would allow them to muscle around those in-between sized competitors (US and AA).

Yet people who say that can’t grasp that competition is occurring now from SMALLER airlines than DL and UA and it is the end of that competition that the DOJ doesn’t like.
AA/US want to argue that it is in the public’s interest to have a third carrier but what is in the public’s interest right now is US because it is serving to check high fares.

Correct. If competition at DCA results in a big enough revenue deficit then the new US+AA will essentially be forced to maintain its "competitive" Advantage Fares program (undercutting UA and DL non-stop fares by up to 40%) to make up the lost revenue. The net result will be advantageous to consumers AND to CLT, PHL and PHX, but then DP might not be able to immediately triple his pay to the level of the DL and UA CEOs.

Except that the whole notion of the advantage fares is that US’ smaller size makes it possible for them to raid the markets of larger carriers and gain a bigger advantage.
When AA/US is of a similar size as DL and UA, then DL and UA have a whole lot more AA/US markets for them to use to lower fares. If DL and UA can start filing these fares in AA’s much larger DFW and MIA markets, then the economics of the Advantage Fares to AA and US disappear.

Didn’t you read the executive email on the subject? They recognized that reality and put it in writing so we could all understand it too.

This merger is going to make the new AA #1 in both the east and midwest and #3 in the west. When the LCC merger was put together the west was basically wiped out for the more profitable east coast operations. I do think that PHX will be safe for maybe 2 years and then get a haircut. LUV's biggest hub is PHX and I don't think the merger will help us compete any better with them. I think PHX will be cut by a third when all is said and done. (I hope I am wrong on this) I think the only thing that will save PHX is the continued extra utilization of aircraft (flex) that is currently a part of the operation.
Regarding this merger, IMO, there will be a settlement before November 25th.

I have no idea who came up with the idea that AA and US would be largest in the Midwest but AA is #4 in the Midwest today based on passenger boardings and #3 in revenue, behind DL and UA, while US is #5. How anyone could think that AA/US with one Midwest hub is going to be larger than DL with two – and the amount of revenue that flows thru AA´s ORD hub is smaller than either DTW or MSP for DL – is hard to fathom. Although AA/US would overtake UA in terms of the #2 pax position, UA and AA/US would be neck and neck in revenue for #2 because UA has a much larger int’l operation in the Midwest, as does DL. DL and UA’s average fares in the Midwest are 15-20% higher than AA and US. DL would still be 25% larger in terms of passengers and 40% larger based on revenue.

And all of this assumes putting together AA and US’ EXISTING networks, which means no divestitures. It also assumes that AA/US’ competitors do nothing and that is not happening. UA’s revenue continues to grow in the Midwest while WN is certain to grow its Midwest revenues faster than the industry average, likely in part due to the fall of the Wright Amendment plus new Latin America services, both of which will add a lot of revenue opportunities to WN.

The notion that the new AA will be the product of the existing AA/US route systems is no longer realistic in light of the DOJ’s actions. There is a SBCIH, to use the phrase of the day, that AA/US will walk out of court with the DOJ having been completely defeated.

 

[dash8roa]

WN's labor force is far more efficient than any network carrier's. And WN also is not afraid of having a higher percentage of their costs come from employees because those employees generate so much more revenue than other employees.

WN does face challenges including an aging workforce but they have an enormous headstart that they are not going to let go of.

Expecting your success to come because of someone else's decline is a very risky proposition and one that in this case is highly unlikely to happen.

I remember flying WN and watching the FA's hustle during the boarding with helping passengers stow luggage and just in general relating with the customers with some humor. On a US flight. one of the FA's spent almost the whole flight talking with a pilot non revving. A world of difference in labor's attitude toward the customer. WN labor may be high paid, but the customer good will they create in being customer proactive is priceless. They also do all they can to keep on time.

 

[P. REZ]

The day the DOJ announced the lawsuit – and it was known it was coming by AA and US execs before that day – the equation changed from “is the cost of a settlement worth it?” to “by how much can we reduce the DOJ’s “ask” if we keep fighting.”
It is also abundantly clear by the action of AA’s creditors that they recognize AA can’t compete long-term as a standalone (again, they are behind DL, UA, WN, and US east of the Miss. and #3 in the Midwest) and thus need US. Thus, continuing to ask if the price is worth it is not longer a valid question. The creditors and US both crossed that line when the merger was announced and the decision was reinforced the day they said they would fight the DOJ.



Again, US constructed the slot deal such that they had no ability to grow at DCA. US gained what it wanted at DCA but still had a strategic shortcoming in the rest of the country.
How unprofitable new AA becomes at DCA depends on how much service any one carrier adds to other hubs. US got lucky with the B6 slot purchase post slot swaps because B6 put most of their slots into one market which trashed that but restricted the damage to one market since BOS is a very poor hub for connectivity.
Slot divestitures won’t happen that way again. WN will get a chunk of slots and they will use them to feed their largest hubs/focus cities where the impact will be greatest. WN knows this might be the last big chance to have an impact.

And it is also very possible that Parker could choose to divest most heavily from the small city slots. They are not going to be the focus of deep fare discounting by a new carrier while slots that are transferred to low cost carriers are going to have a far larger impact on the profitability of the rest of US’ operation; IOW dumping a small city slot will have far less adverse effect on new AA.
The downside is that DL is the carrier that would most likely benefit from divestiture of small city slots – and that is precisely why Parker is trying to fight it. Small city/RJ slots are basically the interest of the big 3 network carriers; UA could serve some of the cities but some are already served from IAD which limits their ability to compete.

The small city slots are not going to generate any real money to AA/US because the market is one of two airlines and the markets are being served for political reasons and not because they can support high slot prices.

If Parker was smart, he’d swallow his pride and divest of RJ slots most heavily, even if DL ends up being the winner and limit the number of large slots – less than 10 would be ideal – to minimize the impact on the rest of the large city operation at DCA.



Yet people who say that can’t grasp that competition is occurring now from SMALLER airlines than DL and UA and it is the end of that competition that the DOJ doesn’t like.
AA/US want to argue that it is in the public’s interest to have a third carrier but what is in the public’s interest right now is US because it is serving to check high fares.



Except that the whole notion of the advantage fares is that US’ smaller size makes it possible for them to raid the markets of larger carriers and gain a bigger advantage.
When AA/US is of a similar size as DL and UA, then DL and UA have a whole lot more AA/US markets for them to use to lower fares. If DL and UA can start filing these fares in AA’s much larger DFW and MIA markets, then the economics of the Advantage Fares to AA and US disappear.

Didn’t you read the executive email on the subject? They recognized that reality and put it in writing so we could all understand it too.



I have no idea who came up with the idea that AA and US would be largest in the Midwest but AA is #4 in the Midwest today based on passenger boardings and #3 in revenue, behind DL and UA, while US is #5. How anyone could think that AA/US with one Midwest hub is going to be larger than DL with two – and the amount of revenue that flows thru AA´s ORD hub is smaller than either DTW or MSP for DL – is hard to fathom. Although AA/US would overtake UA in terms of the #2 pax position, UA and AA/US would be neck and neck in revenue for #2 because UA has a much larger int’l operation in the Midwest, as does DL. DL and UA’s average fares in the Midwest are 15-20% higher than AA and US. DL would still be 25% larger in terms of passengers and 40% larger based on revenue.

And all of this assumes putting together AA and US’ EXISTING networks, which means no divestitures. It also assumes that AA/US’ competitors do nothing and that is not happening. UA’s revenue continues to grow in the Midwest while WN is certain to grow its Midwest revenues faster than the industry average, likely in part due to the fall of the Wright Amendment plus new Latin America services, both of which will add a lot of revenue opportunities to WN.

The notion that the new AA will be the product of the existing AA/US route systems is no longer realistic in light of the DOJ’s actions. There is a SBCIH, to use the phrase of the day, that AA/US will walk out of court with the DOJ having been completely defeated.

WT,

Let me clarify, not #1 in the midwest but #1 in the central part of the U.S. including DFW and the Midwest. The problem would be the West coast.

 

[WorldTraveler]

that's better. Since DFW is the #2 hub in the US, it can pretty much define its class. The problem for AA, strategically, is that they have always been a predominantly east-west airline.... MIA and NYC have balanced that out somewhat but AA's weakness on the east coast is because its MIA and NYC hubs are so heavily int'l focused.

I think the west coast is going to be a major focus point of the industry if the merger goes thru. AA does bulk up but some of that bulk is due to PHX and everyone agrees that PHX is the biggest question mark. Even if new AA agrees to concessions to keep PHX at a certain size for a certain period of time, if the hub loses money and will be overshadowed by DFW, you can't force a company to continue to lose money.

And as has been noted, DL and UA have much larger international operations on the west coast than AA. Without extensive int'l routes, AA is competing to a much higher degree with low fare carriers - and that formula has not worked well. There aren't a whole lot of opportunities to expand int'l flights on the west coast either.

 

[ChockJockey]

LUV's biggest hub is PHX and I don't think the merger will help us compete any better with them.

If you look up WN here you can see that for the period of June 2012 to May 2013, PHX was their 5th largest airport by passenger volume behind MDW, LAS, BWI, and DEN.

I would think as long as we can keep making money doing what they're not in PHX, i.e. Hawaii, Mexico, Canada and Express routes, we can compete with them (t)here. But this depends on what the Grand Strategy is going to be for the West.

 

[P. REZ]

If you look up WN here you can see that for the period of June 2012 to May 2013, PHX was their 5th largest airport by passenger volume behind MDW, LAS, BWI, and DEN.

I would think as long as we can keep making money doing what they're not in PHX, i.e. Hawaii, Mexico, Canada and Express routes, we can compete with them (t)here. But this depends on what the Grand Strategy is going to be for the West.

CJ,

I guess you can't trust a WN employee when they tell you which hub is biggest. My worry about PHX is the fact that flex is part of the operation which leads me to believe it is a necessity for the profitability of this station.

 

[nycbusdriver]

If you look up WN here you can see that for the period of June 2012 to May 2013, PHX was their 5th largest airport by passenger volume behind MDW, LAS, BWI, and DEN.

I would think as long as we can keep making money doing what they're not in PHX, i.e. Hawaii, Mexico, Canada and Express routes, we can compete with them (t)here. But this depends on what the Grand Strategy is going to be for the West.

An even more important factor is SW's Grand Strategy for PHX. The factors you pointed out do not make PHX a fortress for LCC. As USAir regretfully discovered with their "fortress" northeast strategy, SW has the propensity to surprise and dismay much to the detriment of the incumbent. Do you really think SW, as it matures and opportunities for its historical strategies dwindle, will not look to Hawaii, Mexico, Canada and so-called Express routes to continue its expansion?

If one feels that SW has been strong competition for US in PHX, then you haven't seen nothin' yet!

 

[Jester]

CJ,

I guess you can't trust a WN employee when they tell you which hub is biggest. My worry about PHX is the fact that flex is part of the operation which leads me to believe it is a necessity for the profitability of this station.

I have had managers tell me straight-out that if not for flex, PHX would be a money loser, as the ability to reduce or increase flights during certain days of the week is the difference between profit and loss... I would be worried too.

In terms of PHX being the largest in SWA operations, just need to take a trip to LAS and count the number of gates which include all of the C Gates and nearly all of the B Gates... 30+ gates. I think SWA PHX operations have something in the mid-20s in terms of gates.

Personally, I think your prediction of a 1/3 PHX haircut if this merger is approved to be on the conservative side, but at least, you are one of the few PHX people who admit there will be a reduction.

 

[WorldTraveler]

The easiest way to determine the level of flight activity for airlines in their largest cities is with flightstats.

http://www.flightstats.com/go/Airline/airlineScorecard.do?airlineCode=WN&airlineQueryDate=2013-09-02

Based on today's schedules (today is a holiday which may affect schedules) PHX is 4th largest in terms of flights behind MDW, LAS, and BWI with 141 flights. MDW is 60 flights/day larger than PHX. For tomorrow, WN has more flights at all of their cities than today and PHX is tied with DEN with 167 flights/day.

Because PHX has a lot of leisure demand, a flexible schedule is absolutely necessary to be able to maximize revenue with a minimum of costs by not flying when the demand is not there.

 

[ChockJockey]

Do you really think SW, as it matures and opportunities for its historical strategies dwindle, will not look to Hawaii, Mexico, Canada and so-called Express routes to continue its expansion?

No, I'm quite sure they will. Hence my saying "as long as".

 

[wings396]

The case is not about the DL UA duopoly. It's about whether DP & Co "would likey" behave anti-competitively or in a monopolistic manner post-merger in violoation of the Clayton and/or Sherman Acts.

Although there are only 12 directly overlapping (non-stop) routes on which AA and US curently compete (mostly hub-hub with exception of DCA-BNA and DCA-RDU), US currently "competes" (mostly with AA!) with Advantage Fares by undercutting AA and others by about 40% by offering one-stop alternatives (through PHL, CLT, PHX) on AA, DL, UA premium non-stop routes. US+AA has signaled that they will stop this competitive behavior post-merger hence the DOJ+6 Repub anti-trust filing and allegation.

That plus the DP email gift to DL CEO, and various unsundry public "we can stand alone" statements by SK, and the "we're outta PIT/Moon" statements, and the selling of the Tempe headquarters, and TX's fear of losing rural service in favor of US+AA routes that are more lucrative lead to the "surprise" DOJ+6 Repub complaint filing under the Clayton Act.

After a successful run in the CEO/executive suites at UA and DL, we are now serving at a local Tempe restaurant near you...

A bit of misinformation on your part about Tempe HDQ, as it doesn't belong to US in the first place. US leases their part of the building, and the ownership sold off a portion to someone else.
Nice try though....

 

[Crash Pad DCA]

A bit of misinformation on your part about Tempe HDQ, as it doesn't belong to US in the first place. US leases their part of the building, and the ownership sold off a portion to someone else.
Nice try though....

Too funny....
CORRECTION: "US leases their part of the building, and the ownership sold off a portion to someone else".
Any more misinformation that needs to be revised?

 

[robbedagain]

crashpad... how about adjusting the pic caption where it says yes we can and put in there... may be we can!!!!

 

[WorldTraveler]

Someone asked the question about what the slot deal gained US if they have to divest many of the slots they ended up gaining from it.

I did a little more schedule analysis and came up with some interesting data.
The schedule changes from the slot deal have now been completed just over a year so there is some DOT data to show what happened… there is also current schedule data.

First, DL at LGA and US at DCA both have about 25% mainline service at their newly enlarged hubs. Even with large mainline aircraft like the 757 and 321, the mainline aircraft that DL uses at LGA and US uses at DCA are slightly below average for mainline aircraft for all carriers at those airports.
Second, AA has significant RJ operations at both cities; even though they have a smaller percentage of RJ operations than the hub carrier, more than 1/3 of AA’s flights at both LGA and DCA are on RJs of various sizes.

The most interesting difference between DL and US’ operations is that DL’s RJ operations at LGA are heavily weighted to large RJs while US’ at DCA are heavily weighted to 50 seaters. The average aircraft size for DL at LGA is 85 seats and 76 for US at DCA. Interestingly, AA’s RJ operations at LGA are much more heavily large RJ based to be competitive at DL but at DCA they have mostly small RJs. DL’s RJ operations at DCA are heavily 70 seater focused just as they are at LGA.

Another interesting datapoint is that DL connects between 10-15% of its traffic thru LGA while at US it is about 40% even with using smaller aircraft, even in some of the DCA markets which have only 50 seater service a couple times per day. US uses the connecting capability at DCA to support a number of markets that would not have the same amount of service if served solely on a point to point basis.

This data isn’t new information to the DOT, DOJ, or any of the airlines.

The DOJ and DOT could both very accurately argue that at this point (and the slot deal didn’t go into effect that long ago), US is not using its DCA slots as effectively as DL is at LGA. Further, DL’s much higher percentage of local passengers says that the scarce slot resources are being better used by DL than by US. If you reallocate the amount of seats that US is using for connecting traffic thru DCA just on 50 seat aircraft, you could add more than a dozen 150 seat flights.

If US upgraded just half of its 50 seat flights (of which there are 109 based on peak day schedules this week) to 76 seat aircraft (within the scope allowances for AA), you could reallocate 25 flights/day to another carrier.

On the one hand, it is because of the hub that US is able to serve some small cities with the levels of frequency that US provides. OTOH, US has a lot of 50 seaters in the market and provides levels of service that do not maximize the use of the slots at DCA.

If DCA were any other airport (non-political) and had no slots, no one would really care.
But given that AA-US are trying to pull of a merger at DCA which has uniquely different circumstances than other airports and where new AA would have such a high percentage of slots with very few true nationwide low fare routes, other carriers and the DOJ and DOT can easily argue that US could easily divest slots to support 25-30 slots/day which would bring new AA’s slot percentage at DCA down to 60% from 67% combined today. If Parker pushes for the minimum amount of slots going to low fare carriers such as WN (perhaps as few as 10-12 flights/day) with the remainder involving the transfer of slots to other network carriers who would use them for other small and medium sized city routes.

If the slot deal went thru based on current schedules, new AA would have almost 4X more seats than DL, the next largest carrier at DCA behind US. Right now, AA and US combined would have about 2/3 of the number of seats that DL has at LGA. Even apart from low fare carriers, the AA/US merger would create much more concentration among the network carriers at DCA than at any other major east coast airport other than EWR – but which also has a lot more low fare competition and which also faces competition from other airports in the region for the same type of passenger.

US’ DCA hub can continue to be very viable even if US has to divest 30-40 flights/day. US’ total percentage of slots at DCA would remain closer to US’ current percentage than to the combined total of both. New low fare competition could be added to DCA. US would be forced to better use its DCA slots by using larger aircraft and by connecting fewer passengers thru DCA. And the overall balance between new AA and other network carriers at DCA would be much more like at other airports including LGA, JFK, and EWR where there is not currently a 4 to 1 difference in size between the dominant carrier and the next largest network carrier – which is what exists at DCA.