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What Does the $11 Billion Dollar Airline Merger Mean for the ‘Friendly Skies’?

February 14, 2013 at 12:00 AM EST
American Airlines and US Airways announced Thursday the two companies will merge, creating the world's largest airline. The price tag for the deal is $11 billion. Holly Hegeman, airline industry analyst, and Charlie Leocha, director of the Consumer Travel Alliance join Jeffrey Brown to discuss the merger in-depth.
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JEFFREY BROWN: For a closer look at the merger, we turn to Holly Hegeman, an airline industry analyst and founder of “PlaneBusiness Banter,” a weekly industry news publication, and Charlie Leocha, director of the Consumer Travel Alliance, a passenger advocacy group. He’s also a member of an advisory committee on aviation consumer protections for the Department of Transportation.

Holly Hegeman, let me start with you. Was this an act of survival for American Airlines? Why are these two coming together?

HOLLY HEGEMAN, “PlaneBusiness Banter”: Well, I think reason they’re coming sergeant to because it makes financial sense.

I think we have seen — all you have to do is look at Delta Air Lines, for example, and their merger with Northwest to see the difference that has made. Delta Air Lines now is one heck of a competitor, is running an excellent financial operation. It has changed considerably from what it was just five years ago, and that change wouldn’t have been possible without the merger with Northwest.

So essentially what’s happening is the same thing we have also seen with United and Continental. U.S. Airways saw value in American Airlines. They also wanted to try to do this in bankruptcy because it gives a lot of advantages. And so it’s just like the natural order of things in this industry, and I think it’s a positive.

JEFFREY BROWN: Well, Charlie Leocha, that goes to a lot of the analysis I have been reading, that this industry, these mergers are needed almost to stabilize the industry. How do you see what’s happening?

CHARLIE LEOCHA, Consumer Travel Alliance: Well, that’s been the excuse for a long time. And we keep doing the same thing. We keep having airlines go into bankruptcy. So it’s not stabilizing so well.

Something isn’t quite going right. I think that when you keep cutting down the number of airlines, you’re eliminating competition. And when you eliminate competition, the prices are going to rise. Right now, the airlines have the ability to use what they call their own — to hold their capacity lower, and they’re very, very strident at doing that.

And that’s a form of competition or not competing with each other, because they’re not coming in and they’re not competing in terms of capacity. And so that’s one of the big differences. This airline has no benefits for consumers. It only changes or rearranges the chairs on the deck of the ship.

JEFFREY BROWN: Well, that’s not what the CEO said.

Let me ask Holly Hegeman.

Do you see benefits for consumers or do you see any impact on consumers? Because what we heard from the CEO was there’s not a whole lot of overlap between these two companies.

HOLLY HEGEMAN: I disagree strongly.

I think that this is a positive for consumers. And again, I would look at Delta Air Lines as a prime example. I think if you talk to passengers that fly Delta today, if you look at the money that Delta has now been able to put into infrastructure upgrades, for example, in New York, none of that have would have been possible, except or unless the airline had made money.

And when he talks about capacity being a form of competition, I would say that reducing capacity is a way that the airlines can be financially solvent. And the more financially solvent they are, that means it’s better for the consumer, not worse.

JEFFREY BROWN: Mr. Leocha?

CHARLIE LEOCHA: Well, if we’re speaking strictly about financial solvency, this merger has no reason to even happen.

United — U.S. Airways just finished raking in the most profits in their history in this last year. American Airlines has just gone through a bankruptcy process. They finally have gotten control of their labor issues and they have more new planes on order than any other airline. They have got literally billions of dollars in the bank. They could come out of bankruptcy with no problem.

But they decided they want to get together with U.S. Air. And this is U.S. Air pushing this whole merger idea. And I just don’t see what the benefits are to consumers, other than saying, oh, it’s better to have a big airline and have more financial stability. There’s no new routes. There’s no new — real new frequent flier benefits. There’s no increased competition anywhere.

JEFFREY BROWN: Well, the argument is there’s a stronger airline, I guess, right?

Is that what it is, Ms. Hegeman?

HOLLY HEGEMAN: Well …

JEFFREY BROWN: And also, while you respond to that, what about the impact on employees? Are you expecting to see anything there?

HOLLY HEGEMAN: Well, first of all, I have to disagree with the comment about the union situation.

If anything, this merger was a landmark in this industry. We have never before seen the major unions at an airline align themselves with the management of another airline, and basically say we don’t want to work for the current management anymore.

This merger was a lot more complicated than was just described. And in fact, it was the employees of American who pushed for the merger and kept pushing for the merger. They didn’t want American to come out as a stand-alone and they didn’t want to continue working with the current management team.

So that’s a little different. As far as the advantages, there will be a lot of advantages. For one thing, the American — folks that fly American now will have access to a lot more destinations internationally. People don’t understand that U.S. Airways does fly internationally and they will add to the options that American flyers currently have.

For U.S. Airways customers, it’s the same thing. Currently, on the East Coast, for example, American has little feed, as we call it, in the business on the East Coast. This merger with U.S. Airways will give them that much needed feed and will make the airline that much bigger.

JEFFREY BROWN: What does — let me just stay with you.

Informationally, what does — what does happen to frequent flier programs that are so important to so many people?

HOLLY HEGEMAN: Nothing.

I mean, for right now — of course, we’re talking about a time frame that’s going to be stretched out. Nothing is going to change tomorrow. The deal will probably not close until the third quarter of this year, and until then both airlines will continue to operate separately.

As far as frequent flier miles are concerned, nobody is going to lose their frequent flier miles. They’re not going to go away. There will be a new program that will combine both programs and everybody will have their miles intact.

JEFFREY BROWN: And, Mr. Leocha, just in our last minute here, it does have these — it has to go through a bankruptcy judge. It does have to go through certain regulatory — is there any possibility they will hear your argument and block it?

CHARLIE LEOCHA: Well, I don’t know if they’re going to hear my argument, but let’s step back to the benefits to the passengers.

Every benefit that was mentioned is — for American Airlines and U.S. Airways passengers is a benefit taken away from American Airlines with United Airlines. They used to have co-chairs. They still do. They have joint frequent flier benefits and so on. So they’re giving with one hand and taking away with the other.

And I do expect this merger to go through, but I’m hoping that Congress and the DOT will allow us to get some things like airline fees disclosed, so that consumers could actually compare prices across airlines and have more competition there.

JEFFREY BROWN: All right, Charlie Leocha, Holly Hegeman, thank you both very much.

HOLLY HEGEMAN: Thank you.