How to Make American Airlines Soar

by Susan J. Aluise | February 21, 2013 12:45 pm

It was a lovely wedding. A newly liveried Boeing (NYSE:BA[1]) 777 was front and center at the long-anticipated Valentine’s Day fête to celebrate the union of US Airways (NYSE:LCC[2]) and American Airlines (PINK:AAMRQ[3]) into an $11 billion global colossus with more than 6,700 daily flights to 336 destinations in 56 countries.

Let’s not begrudge US Airways CEO Doug Parker his well-earned honeymoon. Since the merger of US Airways and America West in 2005, he has courted two attractive merger partners: Delta Air Lines (NYSE:DAL[4]) and United (NYSE:UAL[5]), both of which left him at the altar.

Last week’s deal makes Parker CEO of the combined airline, which will retain the American Airlines name. AMR chief Tom Horton will be chairman of the board until the first annual meeting, after which he will receive a severance package[6] of nearly $20 million.

AMR’s creditors will get 72% of the combined carrier; LCC shareholders[7] will receive the remaining 28% of what will be the world’s largest airline.

Shareholders will eventually reap rewards from the deal … but only if the two airlines (and their unions and systems) can coexist blissfully. Despite the benefits, the devil is in the details when it comes to airline mergers. Now that he has wrapped up the last major airline merger, here are three things Doug Parker must do to help the new American Airlines soar:

1. Make nice with both airlines’ unions. Support from American Airlines’ unions was a critical part of making the merger happen — last spring Parker launched a charm offensive and reached agreements with American’s three largest unions.

But although five unions at the two airlines came out in support of the merger last week, the union representing LCC’s 14,000 machinists and ground workers said it cannot support a merger until US Airways finalizes its contracts.

Parker has been here before. After the 2005 merger of America West and US Airways, combining the two airlines’ employees was contentious. Parker must nip labor unrest in the bud or the combined carrier will find itself in a distracting muddle it can ill afford.

2. Make systems integration planning a priority. The second-hardest task after combining corporate cultures is merging technology systems. From reservations and check-in sites to aircraft maintenance and accounting systems, airline operations sink or soar on information technology. Expect an AMR-LCC systems integration to take years … and cost millions.

The story of the United–Continental systems integration debacle is a cautionary tale for Parker. As UAL began moving to an integrated system last year, repeated glitches crashed its on-time performance, caused a cascade of flight cancellations and stranded passengers.

CEO Jeff Smisek admitted that the airline has work to do winning back travelers who have booked away from UAL since last summer. Parker doesn’t want a piece of that.

3. Spin off American Eagle. As the regional airline for some 90% of American’s “feeder” passengers, there’s a business case for continuing its operations. That said, the business case falters when it comes to retaining the airline as a subsidiary rather than spinning it off into a separate entity.

Here’s why: Gas-guzzling planes with 50 or fewer seats comprise 80% of American Eagle’s fleet, and the airline likely will be able to cut costs by contracting out feeder service. US Airways already owns two feeder airlines — PSA and Piedmont — which operate as US Airways Express.

Parker has been mum about the unit’s fate, but could be influenced if the Department of Transportation fines American for violating its tarmac delay rule in December. Nine American Eagle flights and five American flights had tarmac delays of more than three hours on Christmas Day. DOT, which is investigating, could fine the airline $27,500 per passenger for violating the rule. In November 2011, DOT fined American a record $900,000 for 15 American Eagle flights that stranded more than 600 passengers on the tarmac Memorial Day weekend. That’s another headache Parker could do without.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.

Endnotes:
  1. BA: http://studio-5.financialcontent.com/investplace/quote?Symbol=BA
  2. LCC: http://studio-5.financialcontent.com/investplace/quote?Symbol=LCC
  3. AAMRQ: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAMRQ
  4. DAL: http://studio-5.financialcontent.com/investplace/quote?Symbol=DAL
  5. UAL: http://studio-5.financialcontent.com/investplace/quote?Symbol=UAL
  6. a severance package: http://www.travelerstoday.com/articles/4866/20130219/tom-hortons-severance-package-american-airlines-ceo.htm
  7. LCC shareholders: http://investorplace.com/2013/02/11-billion-merger-to-create-worlds-largest-airline/

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