New American Airlines now a reality; big challenges ahead

December 6 passed without fanfare, but the New American Airlines is a reality.

The first day of stock trading, under the symbol AAL, begins today. The Ft. Worth Star-Telegram–the hometown paper of the Ft. Worth-based AA–has this story, posted Saturday. The New York Times provides this analytical piece.

We know the US Airways management team reasonably well and we think they will be much better than the former American management. American hasn’t been the same since Bob Crandall retired in 1998. Crandall’s successor, Don Carty, had a lousy tenure. He originated the acquisition of Reno Air, a small airline headquartered in Reno (NV), for reasons that passed all understanding. In doing so, he created ill will with the AA pilots union (which, in fairness, wasn’t hard to do with this bunch of malcontents), creating all sorts of labor issues. Carty also acquired Trans World Airlines, another merger of mysterious motives that appeared more to do with market share than business sense. TWA’s only US hub by this time was St. Louis (MO), a mere 250 miles from AA’s massive Chicago O’Hare hub. TWA’s fare structure was low, competing as it was with fellow-hubber Southwest Airlines and able to attract traffic on price rather than quality.

We’ll never know whether the TWA merger would have been a success. The 9/11 terrorist attacks happened shortly after the acquisition, and by 2003, American was on the ropes. Carty negotiated steep concessions from the employee unions, but the deal unraveled when it was revealed that management simultaneously lined up for tens of millions of dollars in executive bonuses. Carty was forced out in the quid pro quo to complete the concession deal.

Carty’s successor, Gerard Arpey, gained respect from the employees. Over the next few years, more concessions were sought by Arpey as he strove to keep American from following all its peers into bankruptcy. But those bankruptcies allowed all the competitors to shave pension plans, cut wages and benefits and other costs while American remained burdened with higher costs across the board. In November 2011–10 years after 9/11–American finally succumbed and filed for Chapter 11. Arpey, who disagreed with the decision, resigned and was succeeded by Tom Horton.

We were never impressed with Horton, particularly with his view that he deserved $20m in the bankruptcy restructuring. He’s non-executive chairman of American but will leave the company soon. He provided this farewell message to employees.

Doug Parker, the CEO of US Airways and America West Airlines, who engineered the merger, is the new CEO of American. Parker and his team never got the respect we think they deserved for keeping US Airways alive, profitable and competitive with perhaps the weakest route system of the US legacy airlines.

Parker was an early proponent of adopting ancillary fees, a practice passengers really don’t like. But the industry had changed dramatically and free meals, free checked baggage and other stuff of history became just that for all the airlines: history. Today, most carriers make their profits from fees and not the tickets they sell.

Parker will have challenges to bring American back into the forefront of top tier airlines. Its reputation and employee morale have been battered. US Airways continues to rank near the bottom of passenger surveys. Employee group integration at US Airways from the merger with America West continues to be difficult; now add American to the mix.

AA and US will continue to fly under separate banners and certificates for some time, following the examples of United-Continental and Delta-Northwest. Integration of reservations systems, frequent flier programs and so on will undoubtedly present huge challenges. We fully anticipate passenger disruptions, also following the pattern of the other mega-mergers.

One of the things we expect to see is an employee contest for a new livery to replace the one adopted by Tom Horton. The tail logo is just awful, though the fuselage and stylized eagle are fine. When America West and US Airways merger, Parker held an employee contest and the winner is what’s painted on the US Airways planes today. It was a good was to involve employees. Then legacy paint jobs of the predecessor airlines were added to the fleet. We have no doubt this will happen at the New American. There are plenty of aviation geek ideas for an American livery. Some may be found here. From this link, you can click through to various other sites for some pretty creative ideas. We like several of the renderings at this website. The last two are what Horton should have adopted.

Odds and Ends: Slowing sales; Airbus in Japan; MRJ delay; Crandall on merger

Slowing Jet Sales: Within a few days, Bloomberg, Reuters and The Seattle Times each had stories about slowing jet sales.

Here is the Bloomberg story, focusing on cargo sales.

Here is the Reuters story.

Here is The Seattle Times story.

The theme of each is worrisome, but with Richard Aboulafia’s comments to The Times, we disagree with his view on American Airlines. American has an ancient fleet of Boeing MD-80s and aging Boeing 757s that have to be replaced, and we believe the Airbus and Boeing orders won’t go away if the merger with US Airways is blocked.

Airbus still trying Japan: Airbus, which has never had a lot of luck penetrating the market in Japan, still appears to have an uphill battle, according to this article. The Reuters piece quotes Airbus’ John Leahy at the Paris Air Show; when we spoke with Leahy by phone from the IATA AGM immediately before the PAS, Leahy wasn’t quite as upbeat as quoted in the Reuters article. Leahy tamped down speculation that he’d have a Japanese order for the A350 at the PAS (and he did not) but neither was he ready to predict any timeline when one might be forthcoming.

Aspire Aviation continues to believe Boeing may place the 777X wing production in Japan as a means to secure 777X orders and block the A350.

Mitsubishi’s delay: Mitsubishi’s latest delay on the MRJ90 program is being blamed on not following FAA process, according to this article.

Poor South Carolina 787 deliveries: All Things 787 reports that Boeing’s Charleston (SC) 787 assembly plant has delivered only four 787s this year.

Crandall on DOJ AA-US lawsuit: Former American Airlines CEO Robert Crandall (who retired in 1998) has a very good analysis of the faults of the Department of Justice lawsuit to block the American-US Airways merger in this Bloomberg TV interview. He’s first up in the 22 minute segment.

Desperation: Kingfisher sued International Aero Engines for $236m over allegedly defective and poorly designed engines on the Airbus A320. This doesn’t pass the laugh test and smacks of desperation. The V2500 has been on the A320 for decades and seems to have been designed just fine and performing well.

Replacing the 747-400

Replacing the venerable Boeing 747-400s remaining in passenger service is a prime objective of Boeing and of Airbus. The business case for their respective 747-8Is and A380s rests in large part on this approach, though for Airbus the A380 business case also rests on passenger traffic doubling every 15 years and restricted airport slots.

Replacing the 747-400, in fact, doesn’t leave a lot of room. There are just 306 passenger models remaining in service, including VIPs and government uses, according to data provided Leeham News. There are another 23 747-400C (Combis) remaining in service.

747 In Service Chart

Data at July 2013.

Fully 42 747-400 passenger models are in storage. Many 744 “Ps” have been converted to cargo airplanes, supplementing new-build 747-400Fs (above). The 744Ps in storage and in service are obvious candidates for conversion to freighters, and there are a number of 744Fs in storage ready to return to service when the slow-moving global cargo demand recovers–which has proved to be a maddening slow process.

747 Stored Chart

Date as of July 2013

Airbus has been more successful selling its A380 to 747-400 operators than Boeing has in selling its 747-8I. Airbus has likewise been more successful at selling the aircraft to non-747-400 operators, though the customer quality in several cases was dodgy. Kingfisher Airlines has collapsed and it’s unlikely Hong Kong Airlines will take delivery of the A380, openly talking about swapping these orders for smaller aircraft.

And therein lies the rub.

747 A380 Fleets

Sources: Airbus, Boeing, Ascend at July 2013

Update: Typo on the Lufthansa remaining orders for A380s: 7, not 17.

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DOJ lawsuit vs AA-US reads like political document

Note: Some articles of interest:

  • Robert Crandall, former CEO of American, has this op-ed piece in The Wall Street Journal (via Google News, so it should be accessible to Readers).
  • With the concentration of airline service that the US Department of Justice is so worried about, this article argues that foreign carriers should be allowed to operate US domestic service.

The lawsuit filed by the US Department of Justice against the proposed merger of American Airlines and US Airways reads more like a political document than a legal brief.

It’s clear the true intent is to force American and US Airways to divest slots at Washington Reagan National Airport. But in throwing in the proverbial kitchen sink, DOJ has made a mockery of its own case.

DOJ claims more than 1,200 city pairs will be adversely affected by the merger, with most of these being connections since the non-stop overlapping routes number only about a dozen.

But lots of the city pairs cited by DOJ are pretty obscure. Just to pick a dozen examples:

DOJ Examples of Connecting Routes
1 Austin, TX-Palm Springs, CA*
2 El Paso, TX-Kahului, HI
3 Columbus, OH-Fresno, CA
4 Des Moines, IA-Kahului, HI
5 Kapaa, HI-Tucson, AZ
6 Albuquerque, NM-Salinas, CA
7 Albuquerque, NM-Kapaa, HI
8 Charlotte, NC-Grand Junction, CO
9 Charlotte, NC-Durango, CO
10 El Paso, TX-Salinas, CA
11 Charlotte, NC-El Paso, TX
12 Harrisburg, PA-Fayetteville, AR

Some of the cities listed in the DOJ complaint (like Salinas, CA) aren’t truly served by airlines but rather by nearby airports (in this case, Monterey (CA). In another, Palm Springs (CA) is actually shown in the complaint being served by Riverside (CA). DOJ seems obsessed with city pairs involving Kapaa (HI) and El Paso (TX). Figuratively speaking, the three people per year flying between some of the city pairs cited by DOJ are really going to drive the market (queue the sarcasm).

DOJ appears to be really stretching in its attempt to make an anti-trust case.

DOJ’s lawsuit is replete with uninformed and ill-informed assertions that in aggregate make it clear the department simply doesn’t understand the dynamics of the airline industry.

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APA speaks about potential American-US Airways merger

From the Allied Pilots Association leadership to its membership:

Fellow pilots,

The APA Board of Directors reconvened today at 9 a.m. at union headquarters as part of the ongoing four-party negotiations between American Airlines and US Airways management, APA and the US Airline Pilots Association (USAPA) on behalf of US Airways’ pilots.

These negotiations are aimed at reaching a Memorandum of Understanding (MOU), or interim agreement, to address each pilot group’s respective concerns if the two carriers proceed to merge. The MOU would serve as the transition agreement and would also include improvements to our newly ratified collective bargaining agreement.

Some have suggested that the only way APA should “agree” to a merger is to first negotiate an integrated seniority list with USAPA. Major corporate mergers involving represented employee groups don’t work that way. No legal mechanism exists that would allow union-represented employees to interfere with a major transaction such as a merger. With McCaskill-Bond the law of the land, unless management predicates a merger on an integrated seniority list—much as we saw at Southwest in their acquisition of Air Tran–we are left to pick up the pieces after the merger has occurred.

While APA’s institutional position has consistently been one of support for a merger between the two carriers within bankruptcy, support for a merger at this juncture is not unanimous within the union. Likewise, AMR management has not embraced the concept of expediting a merger before restructuring concludes and clearly wants to retain control of the corporation and consider a merger on their terms following exit from bankruptcy. Keep in mind that AMR management has executed four different mergers—beginning with Trans Caribbean and ending with TWA—while completely disregarding the impact on our pilots’ seniority. I doubt that pilot seniority is anywhere near the top of their concerns right now. Likewise, I doubt that  pilot seniority would be a key consideration if they were to execute a merger with US Airways, JetBlue or any other carrier following an independent exit from bankruptcy.

Instead, what we’re seeing is likely a deliberate attempt to sew fear amongst our pilots in an effort to derail consensual merger talks. A small group of pilots, with assistance from AMR management and a former CEO [here and here], has been advancing the notion that an integrated list should be a precondition to any further consideration of a merger. Their motives are crystal clear: hold on to the reins of power and control any merger on their terms. To be clear, fundamental capital transactions such as a merger involve a large number of parties. By virtue of the 13.5 percent equity stake we now hold as part of our ratified agreement, APA can exert influence over various aspects of a merger as a major stakeholder in AMR. However, we don’t have the ability to stop the clock and make everyone else wait while we sort through all of the issues associated with an integrated seniority list. To suggest otherwise is disingenuous, and simply ignorant of the law and the facts.

Our advisers have indicated that if we do not finalize an MOU in the very near future, in all likelihood there will be no merger before American Airlines exits restructuring. An MOU specifying wages and working conditions for the pilots, along with interim seniority protection in the form of fences, would enable creditors to identify synergies that would result from a merger of the two carriers. Absent an MOU, the financial benefits of a merger would remain unclear.

We all understand that seniority is extremely important to our careers. Of course, your seniority number is irrevocably tied to the airline you work for, so it’s likewise critical for your employer to be able to compete and thrive. The analysts who study our industry and make judgments about which airlines are best positioned in the marketplace have been virtually unanimous in the view that a merger with US Airways represents the best way to address our airline’s current deficiencies. Make no mistake—a merger of some sort is inevitable. The questions before us: Who do you want at the helm and do you want the ability to have some control over the process? In a post-bankruptcy merger, we would have little ability to influence any potential leadership changes at American Airlines and would represent nothing more than a speed bump.

It’s worth revisiting some of the reasons why the APA leadership decided several months ago that despite the inherent difficulties, a merger with US Airways represents the best path to a reinvigorated American Airlines and, by extension, a brighter future for us all. With the mergers of Delta-Northwest and United-Continental, American Airlines now stands at a distant third (and, by some measures, fourth in the U.S. industry) in terms of our revenue base and route network. A merger with US Airways is essential for both carriers and represents the quickest way to recapture the critical mass essential to competing effectively with those two carriers.

We have seen a model for a successfully arbitrated seniority integration at Delta-Northwest using fences and a ratio methodology based on a percentile seniority list ranking. Also, if an American Airlines-US Airways seniority integration were to be arbitrated, our attorneys have indicated that the ongoing seniority dispute between “West” and “East” at US Airways would be settled as part of the process and should not have any negative impact on an arbitrator’s decision under the McCaskill-Bond statute.

Many analysts believe that American Airlines finds itself in its present predicament because of an excessively cautious approach to consolidation during the past several years. Instead of vigorously pursuing Northwest Airlines as a remedy to American Airlines’ deficiencies in the Asian network, they sat on the sidelines as the rest of the industry flew by. How much longer should we wait before deciding that something needs to happen to fix American Airlines’ revenue and network disparities? Merging within bankruptcy also affords APA opportunities to “re-attack” sooner rather than later to capture additional contractual value in the form of a transition agreement/MOU for our members. On the other hand, a “wait and see” approach would ensure that American Airlines exits Chapter 11 restructuring as an independent carrier with our newly ratified contract. At that point we would have no mechanism for making any near-term contractual improvements, and little ability to influence the management structure or strategic direction of the corporation.

If the four parties agree to an MOU/transition agreement, we would proceed to the next phase of the process, which would involve the creditors assessing the financial benefits of a merger. If a merger meets with their approval, a series of additional steps would have to occur before a merger is approved and the new company exits restructuring, including consideration by the two companies’ boards of directors; antitrust review by the federal government; and approval of a plan of reorganization by the Unsecured Creditors’ Committee and the bankruptcy court.

Upon exit from restructuring, an application for single-employer status with the National Mediation Board must be made, which would take approximately six months. Once single-employer status is declared, we would go through a process to determine the bargaining agent for the pilots. After that we would begin negotiating a joint collective bargaining agreement (JCBA), which would focus primarily on reconciling and integrating the US Airways pilots into the American Airlines operation. This JCBA must be completed within 24 months of a plan of reorganization being approved. If not, it would be submitted to binding arbitration for any remaining open items. Seniority integration negotiations would then commence. In the interim, we would operate in accordance with the protections stipulated by the MOU, including fences and provisions to ensure that pilots on the American Airlines seniority list would operate any aircraft delivered as part of the previously announced aircraft orders.

Fellow pilots, we understand your keen interest in the ongoing MOU negotiations, and we will continue to provide updates as developments warrant.

Thank you for remaining engaged in determining our collective futures.

In unity,

Keith Wilson

First Officer Dennis Tajer

Allied Pilots Association (APA)
APA Industry Analysis Committee – Chairman
APA Communications Committee

Odds and Ends: E-190 v Superjet v BBD in Russia; China’s aviation; WestJet’s speed dating; Crandall speaks

E-190 v Superjet v Bombardier: With the finding that the pilot of the demo flight of the Sukhoi SSJ 100 Superjet simply flew into a mountain in Indonesia, rather than there being a problem with the airplane, the cloud has been lifted from the aircraft. So the direct match-up of the SSJ vs the Embraer E-190 can now be compared and this article does so. Bombardier’s CRJ-900 and CRJ-1000 also compete.

China’s Aviation: Airbus and Boeing think China pose the greatest threat in the future, but this analyst is less enthusiastic.

WestJet of Canada: The low cost carrier took a bold step to order up to 45 Bombardier Q400s to feed itself. Now it’s using speed dating to decide where to fly the airplanes.

Crandall speaks on AA-US merger: Former American Airlines CEO Robert Crandall weighs in on the merger between American Airlines and US Airways.

The downward spiral of American Airlines

We’ve been watching with dismay the downward spiral of American Airlines.

This once-great carrier is hardly recognizable any more. It is perplexing to us how a management team that got its training under Robert Crandall and helped create such a great carrier could have gone so wrong.

Crandall retired in 1998 and was succeeded by Don Carty. We have to admit we preferred that Bob Baker, the EVP of Operations, succeed Crandall but Baker already had battled cancer and was viewed as probably on a shorter life span given the nature of his cancer. Unfortunately, this assessment was correct and Baker died a few years later.

Carty, on the other hand, was Crandall’s number two (to Baker’s number three) in the company. But Carty had also been CEO of Canadian Airlines and frankly, we were never too impressed with his leadership there. It was this that gave us trepidation when he succeeded Crandall.

The Crandall team also included Gerard Arpey, who subsequently succeeded Carty after Carty so screwed up labor relations that he had to go. Carty acquired Reno Air, a small MD-80 operator with a hub in Reno (NV) and in the course of doing so, created immense discord with the AA pilots union, having failed to lay the ground work with them for the acquisition. Reno Air brought zero to American and less than zero when the labor relations debacle is considered.

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