We had the opportunity to sit down for a one-on-two interview with Scott Kirby, President of US Airways, and Derek Kerr, EVP and CFO, during the annual media day. We covered labor, fleet planning, change fees and the new American Airlines livery.
When we talked right after the merger was announced, you indicated that all the labor problems at US Airways were solved and you had agreements with American’s labor groups. Yet I read about continuing labor issues. Bring me up to date about this.
Derek Kerr: I think what we’re talking about is we have a road to solve all the labor problems. The contracts have a methodology for the pilots and flight attendants for who we’re going to get there. The only thing we have right now is our ramp and mechanics. We don’t have a deal with our ramp and mechanics and we’re negotiating that today. That is in normal negotiations. We’re going through with a mediator. That really is the only area where we are working on from a stand-alone perspective to try and get a deal done with our group. It’s a little complicated because we are trying to work the two groups (TWU represents American Airlines, IAM represents US Airways-Editor.) From the standpoint of where we are today, we have to road to get the pilots done. We have the road to get the flight attendants done. We have the ramp and mechanics on [the American] side complete. We have a six year deal. We’re trying to get our group together with that.
American is taking about 65 A319ceos. US Airways has a large fleet. You indicated when we talked right after the merger was announced that you expected to use some of US Airways’ 319s on American routes, but at that time it was too soon to draw any conclusions about the integrated fleet plan. What is your thinking today?
Kerr: As we sit here today we are happy with both orders [for Airbus and Boeing American] has in place. They will be replacement aircraft for what American has. We’ll finish our Airbus order and replace our [Boeing] 737s and the older [Airbus] A320s. On their side, we’ll replace all the MD-80s and all the older aircraft there. They’re going to start taking all the A319s at the end of the year. Those are in the pipeline and they are going to start to come. The question is as we go through this planning process and start the integration teams of the fleet as a network…they’re going through right now looking at the fleet plan and looking at the network. We can’t do anything yet but we can plan it out. They are looking at exactly what you’re talking about. Do we continue from a 319 perspective and take every one of the 319s they have on order or do we change the gauge at some point. There’s going to be a core group of 20-25 that are coming within the next year that are going to come because we believe we need them. There is a hole in the American network for 319s. We have 86 319s that we could take and fly in the network. They probably need more than what we have in our overage. We will take 319s in the American order but at some point in time we will look at that and whether we should be up-gauging that to 320s and 321s.
The engine decision for the CEO family has been pushed off to the October timeframe. The analysis for regional jet replacement is underway and expected within a year.
When Bob Crandall ran American, he was very proud of the yield premium American had over the competition. That premium is gone. What can you do to bring it back?
Scott Kirby: A lot of the synergies are about winning back corporate and elite customers. When United and Delta created the bigger networks, the comprehensive networks that a customer living in a place like Buffalo (NY) [were created] [and they] could get everywhere they wanted to go on those two networks. There has been a shift of customers to United or Delta. Those are high-yield customers that we expect to be able to win back. I am comfortable we will win them back. I expect our yield relative to the industry to improve as a result of the merger.
United Airlines just raised its change fee from $150 to $200. Customers are getting pretty tired of these kinds of fees. Is US Airways going to match this?
Kirby: We have matched it [at midnight last night]. It’s still a great value. We offer really low fares for consumers. We have fully refundable fares, which are more expensive. But to block seats for low fares that you can’t sell is really the rationale for having change fees. If you look at the industry, taking the fares and making them low has been fantastic for the customers. Air fares and where they are are much lower in inflation-adjusted terms than where they were 10 years ago, 20 years ago, 30 years ago. Air travel is a fantastic bargain. You often pay more for a single night in a hotel room than you do for the air fare. We’ve driven fares down but to do that we have to charge customers to use those services, and for those services. If you compare airline fees to rental cars, hotels, banks, we’re way on the low end.
These change fees are getting to be larger than some of the air fares themselves.
Kirby: What comes with the low fare product is certainty. If the seat is bought up nine months in advance and you want to change it three months in advance, that’s six months of the selling window that seat was gone. Our yield management systems are designed that when that seat comes out of inventory to decrement that seat from sale. Even though it is sold far in advance, we’re not selling that seat. It’s gone from inventory.
You have the prospect of reselling that seat at a higher fare. With load factors of 85% the airplane is sold out.
Kirby: That’s not accurate because we’ve built a forecasting model that says we’re got 100 seats to sell at the low fares, for example, and if you take one of those out of inventory that means if we think we can sell 50 seats for high fares and that low fare customer says, ‘oh, we’re not going to fly,’ we still only think we can sell 50 seats. Now we’re only going to have 149 passengers instead of 150. The seat comes out of inventory and it comes out of potential sales. It’s the way the yield management system works. If we thought we had the opportunity to sell the seat at a high fare we would have only sold 99 seats at a low fare instead of 100.
Are you going to keep the new livery adopted by American?
Kirby: We think it is important on the livery we think it is important to have involvement of the 68,000 employees at American and the 32,000 employees at US Airways and for all employees to build pride in the paint scheme. I don’t know for sure [if there will be an employee contest] or what process but it’s important to have the employees involved and excited about it.