SCOTTSDALE — On Valentine’s Day the ‘marriage’ of two giants would result in the creation of the largest airline on the planet. US Airways and American Airlines announced the creation of a new airline, that combined, would result in a value of $11 billion (American Airlines Press Release). For investors, devotees of industry consolidation, and many employees of both airlines, this amounted to a marriage made in airline heaven.
What does it mean? For starters, over the next few years passengers will be flying in 600 new mainline aircraft to over 336 destinations in 56 countries. The combined fleet of both airlines will surpass the 1,500 mark, allowing the “New American” to offer more than 6,700 daily flights over one of the most vast route networks in the industry, particularly domestically and through Latin America. This new company, being billed as the largest airline in the world, will employ 110,00 team members. USAirways is already profitable and American is clearly on its own path to recovery.
Operationally, both airlines have made great strides as well. US Airways had 83.75% of its flights depart on time during the first quarter of 2013. This means that out of 64,744 flights, only 10,524 suffered a delay. American Airlines, on the other hand, had 81.01% of its 85,640 flights depart on time. These are really good numbers considering the massive scale the industry is based on, and considering the sometimes negative perception among customers and the press.
Though USAirways has put on its Leadership Conference for 6 years now and well attended Media Day for well over 10 years, this particular event for obvious reasons, would taken on significant importance. On May 2nd, 2013, US Airways held its Airline Leadership Conference, geared to the company’s staff, where everyone gets a detailed look at the current financial, operational, strategic and governmental state of the airline they work so hard for. These workers have the opportunity of seeing and understanding their company’s health directly from their executives, who present all the details followed by a Q&A session, where any question can be asked directly to the executive team. The positioning for this year’s conference was very much oriented to the merger and its impact: “Change, Challenge, Opportunity.”
“Change, Challenge, and Opportunity” – These three words perfectly portray the mindset of the company as USAirways, the guppy, prepares to swallow the whale. On that tone, the conference began with an uplifting and congratulatory video celebrating the achievements of US Airways, including several economic and statistical features that have allowed the airline to be amongst the top in on-time and revenue performance.
The conference room, appointed with 6 different Airbus scale models, erupted into applause when Captain Sully’s A320 appeared in the introductory video floating in the Hudson River as one of the key events that made the airline’s recent story. This is surely an iconic moment of heroics which will remain a key point of the airline’s history.
The video also unveiled the all-new catering service being introduced in Envoy and economy classes (buy-on-board).
After the video concluded, Elise Eberwein – Executive VP People, Communications & Public Affairs, welcomed everyone in the audience with a short presentation on how US Airways generated the headlines over the last months. This year, for the first time at an ALC, the room had as guests a large group of American Airlines staff, and Flight Attendant Union members. They were welcomed by Eberwein, each one by name.
Next, It was USAirways CEO Doug Parker’s turn to address his workers on this special day. His presentation consisted on a “fly-by” review of the last 5 ALCs, and narrated how the event has evolved along with the world economics.
The 2008 ALC was based on the ‘reliability’ that needed to be attained to gain more market share and stability. The results after that conference were superb, reaching a leading operational turnaround in less than a year’s time. In 2009, Parker said the focus in the economic difficulties the country had faced since 2008 was paramount. The results for this period weren’t anywhere near what they expected, losing nearly $1.3 billion in less than 24 months.
The situation led the 2010 conference to concentrate its forces in helping become US Airways a profitable airline, presenting viable solutions to have the balances “in the green” by December 2010. In spite of economic odds, the airline made a $447 million profit in that year, marking a success that proved their relentless strategy of cost cutting and ancillary revenues the correct.
Later on, in 2011, the ALC featured a plan for sustainability. Parker explained how it was necessary to maintain the airline’s effectiveness even in bad times – specifically with soaring fuel prices. Regardless of the rocketing prices of oil and aviation fuel, US Airways managed to score a $111 million profit, flying in the face of its competition.
Finally, in the 2012 ALC, Parker explained how it was necessary for the airline to “control its destiny.” Interestingly enough, there were talks and rumors about the airline merging with one of the “available” carriers in the US industry.
Record profit and reliability were recorded in that year followed by the public announcement of USAirways aggressively pursuing a merger with American Airlines. Parker said “all the good things came together. We had record-breaking operational results in 2012. The US Airways team managed to reach unbelievable set of results.”
He then continued to talk about the merger, which in his own words, was “a complete Home-Run!” He explained how merging with American was simply the best way to go, and that he is extremely confident of what lies ahead. He closed his intervention thanking the entire airline’s staff saying, “We are building THE BEST airline in the world. What you all did this last year was phenomenal! You are the best!”
After a boisterous round of applause, Doug ceded the stage to the airline’s president, Scott Kirby, to talk about the creation of the world’s largest airline.
Kirby began his presentation thanking all the AA folks that were present at the event and then began talking about executing on the creation of the world’s largest airline.
“Better watch out for us!” he said at the beginning of his speech. “We are very optimistic about this merger. The stock prices of both airlines are at their best. Those who purchased AA shares the day before entering into Chapter 11, will now receive a 140% return. That’s simply amazing!”
Expecting to create plenty of value once the process is finalized, they expect in terms of revenue, to have synergies of over $900 million, achieving costs saving by $550 million. According to Kirby, synergies will be extremely significant in the business model.
Expanding with interesting economic details on the current US Airways situation, he said how their operational costs are now much lower than Delta and United, allowing them to make profit despite being considerably smaller than the competition. As for scale, Kirby pointed out “With our merger, we’ll have the best domestic foundation in the US,” he said.
Kirby then turned his attention to US’ future OneWorld inclusion. He explained how the current US-International Airline Alliance share is lead by Star Alliance with 45% of market share. With US Airways leaving 3rd ranked Star Alliance for OneWorld, Star’s market-share will be reduced to 34%.
Kirby explained how “thanks to the consolidation of these two strong airlines, and our inclusion to OneWorld, we have more ways than our competitors to take our passengers anywhere in the world with more options and better fares.”
Kirby then talked about the future situation with their Phoenix corporate office and hubs in Phoenix, Charlotte and Philadelphia. He explained how there will be some corporate presence in Phoenix, but reiterated the general headquarters of the “New American” will be in Dallas Ft. Worth with Doug Parker as the new CEO and Tom Horton sitting at the Board of Directors table as Chairman. Horton will leave following the airline’s integration an Parker will gain the Chairman’s title.
With regards to the hubs in Phoenix and Philadelphia, which have been under the spotlight given their proximities with American’s biggest hubs at DFW and NYC JFK, Kirby commented that PHL and JFK are nothing but complimentary to each other. “I have been asked this question a million times,” he said. “Philadelphia and JFK [AA], perfectly complement each other. American’s excellent hub operation and dominance in the New York – London route will be paramount for our North Atlantic strategy. In Philadelphia, we have an excellent domestic-international operation, which can’t interfere with our strategic position in JFK. In conclusion, if a hub is profitable, it’s compatible,” he stated.
He then spoke of the sentimental decision of having to relinquish the US Airways name for American Airlines, but acknowledged the American brand was clearly the strongest, particularly abroad. There as never a remote thought as to what the surviving company’s brand would be. As for full integration, Kirby expects the entire merge to be completed within the 18 to 24 month time frame, obtaining a single operator certificate and airline integration by the end of this period.
Following the Kirby’s presentation, it was time for Derek Kerr, Executive VP and CFO for US Airways to speak to the assembled crowd. His tone was slightly different as the main topic of his exposition was the current trend of high fuel prices and the economic summary over recession and the impact on the aviation industry. Kerr highlighted how US Airways was able to fight these variables with better operations performance, optimization of capacity, new revenue streams and better capacity allocation.
Expanding on the new revenue streams, he talked about the ancillary items that are offered on board every US Airways flight. New Choice Seats are offered for $45, often well located throughout the cabin; a new Preferred Access product, which allows a passenger to board ahead of time; Go-Go Wi-Fi Internet available on domestic flights, and an updated menu for sale on board all domestic and international flights.
According to Kerr, ancillary items boost revenues by very high rates. During the first quarter of 2013, profits have reached to $55 million with increasingly load factors.
The next executives in line to present were Robert Isom and Andrew Nocella, COO and Senior VP Marketing. According to Isom, the key to success in US Airways is Reliability, Convenience and Appearance. By applying all these principles, results come in with a guarantee.
“US Airways has the best industry performance and safety metrics in the US,” he said. “We run the most efficient schedule in the business and we are known for helping our customers rebook missed flights in record times,” he said.
Isom continue on the prevailing theme of making a giant airline from two separate entities. “We must act like one carrier if we want to be treated like one,” he remarked. “That’s why we have assigned the merger tasks to an Integration Management Office who will report to the transition committee on a regular basis. In total, 29 teams and 4 cross-functional groups will take care of all merger duties,” Isom explained.
Finally, he spoke about changing into a new corporate culture and making other things work. “No detail is too small, we need to walk before running. However, I’m sure several things will remain separate and in a long-term stage we could see them becoming one,” he said. “We are now in the planning phase of the merger, so there’s a lot to work on,” he concluded.
Nocella shifted the topic to the marketing-end of the merger. According to him, US Airways will continue adding capacity to its current network and both airlines will operate separately until the single operating certificate is obtained.
He spoke about the Frequent Flyer Program (FFP), which will become the largest and most proficient in the industry. “AAdvantage is the first and biggest FFP in the world. By putting our programs together, we’ll have the very best in the industry,” he said.
Nocella then enlightened the room with a rather smart statement: “I have been here before stating how Star Alliance was the best out there… Today I can tell you all I may have been misquoted! I meant OneWorld. OneWorld is the preferred alliance for premium customers, and we are happy to join them,” he said.
With regards to the co-brand Credit Card that American has with Citi, and US Airways with Barclays, Nocella said they need to evaluate which is the best course of action that will benefit all the participants. “This is a lucrative activity for us, but even more so for the banks,” he added. “The result will be the second largest co-brand program after Sears! Imagine how big it will be,” he concluded.
The presentation ended with a description of the best and worst performing regions in the airline’s network. Allegedly, Hawaii, Central America and the Caribbean represent the best performing routes for the airline. On the other hand, South America remains the lowest-performing area for US Airways. This, however, shouldn’t be a problem once the merger is completed given American’s strength in the region.
A point made very clear is that even as the merger moves forward, US Airways will continue its expansion plans including the opening of the Charlotte – London/Heathrow service, operated with Airbus A330-300 equipment. Sao Paulo also receives the presence of US with daily Boeing 767-200 until these are replaced with new Airbus A330 coming in before the end of the year. Lastly, Shannon (IR) will have a direct flight from Philadelphia during this coming summer season. By Fall 2013 the A330s will have replaced all the 767-200s, some dating back to the Piedmont Airlines era before US merged with them in 1989.
In other fleet news, on short/medium haul routes, the company announced 16 new Airbus A321 aircraft will arrive to replace the last of the Boeing 737-400s by fall.
The conference ended with a Q&A session where all the audience could ask questions for a one-hour window frame.
We took on the opportunity and ask Doug Parker his thoughts on the new American livery, given the fact that he and his team didn’t participate in the design and development of the new corporate image. We also asked whether the livery is set in stone for the future, and this is what he replied.
“We like the new livery, it’s a very smart design. However, I don’t think it’s set in stone and by the time the merger goes through, reality tells us we’ll see three liveries out there, the old American and US Airways, and the new American. We might look into making an image that brings the best out of the three. This is just saying… I don’t really know the answer to your question!”
This kind of honesty is characteristic of the honesty, humor, and sometimes bluntness Parker is known for. Clearly, this is just one of the many issues on the table on what will be a wild ride and insure next year’s USAirways Annual Leadership will have even more answers, but likely even more questions.
Thank you to Katherine Overkamp, Jenna Zito, and the US Airways Communications Department for having us at the conference. Disclosure: USAirways provided transportation to the event as well as lodging.