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.

14 Comments on “New American Airlines now a reality; big challenges ahead

  1. I think the tail will stay largely the same or go through a minor tweak. Since the merger was already in process during the livery change, why didn’t AA at least consult US a bit?

    • The tail is the worst part and a return to the AA on the tail would be nice, but to change the paint scheme now would show running an efficient airline is not a top priority. The new management team will I hope not disassemble the customer service aspect of the old AA. US was not known for their customer service and their frequent flyer program was not on par with AA.
      Its going to take a long time to integrate the two carriers and they need to capitalize on the AA worldwide brand recognition and raise the bar beyond the present US level of service.

      • but to change the paint scheme now would show running an efficient airline is not a top priority.

        Not if only a few planes have been painted to date. They could keep the UGLY popsicle tail one’s already in the fleet and phase in something new and pretty.

  2. what? Malcontents in a union?…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.

    Who knew this was important in the aerospace/aviation industry?

  3. @Leeham.net:

    “We were never impressed with Horton,”

    Tell me Scoot, just how many bankruptcies in US History (let alone aviation history) have bond-holders been made “whole” and shareholders receiving money back?

    I fly AA 50k-100k miles for the past 10-12 years, there is definintely a change since Horton took over.

    His team has done an incredible job since he took over.

    Also, was it not Horton who was able to get the blockbuster Boeing/Airbus deal? That in itself should get him the $20 million in compensation (along with his other accolades).

    IMHO AA have an earnings problem in a few years.

    Adding US Airways low-yielding routes to AA’s network and its new cost structure isn’t sustainable in the long run.

    The “lollipops” Parker has promised to the various unions wasn’t fiscally smart.

  4. @Leeham.net

    Apologies about the spelling error of your name. I wish there was some kind of “editing” feature.

      • Hahaha…touché 🙂

        Jokes aside, my points IMHO are very valid.

        Prior to posting, I also didn’t know Parker was going to get > $14 million in compensation just from the merger itself. This doesn’t include his compensation going forward (which was >$5 million in 2012).

        I can’t see how this will go will with the various unions.

        • The WSJ article makes it clear Parker’s stock compensation is mostly related to specific achievements and if these aren’t met, he doesn’t get it.

          • I’m not saying he won’t achieve his short-term numbers it as you know as much as I know that management love to “hit their numbers”. I don’t see this however going well with the passengers and unions, etc. as this will entail cuts and lay-offs.

            More important, if Parker hits his numbers, it will give the BOD incentive to give Parker a good compensation going forward – and as you know, this is something unions definitely wouldn’t like.

            Parker in 2012 made >$5 million – I don’t see how he wouldn’t make more with a much, much larger carrier with much larger revenues, etc.

            I know you are highly supportive of Parker but I don’t think you give Horton enough credit.

Leave a Reply

Your email address will not be published.