On Tuesday, American's CEO did a public 180 and now says the line is looking at a potential merger ... but as the acquir-er, not the acquir-ee. And the notice listed five potential candidates: Alaska, US Airways, JetBlue, Frontier, and Virgin America. Some of those choices seem logical; others do not. And, as usual, the business press is all over the financial aspects of the possible deals while ignoring consumer implications.
It has always been the front-runner, but implicitly as winding up running the show. That’s what happened in 2005, when the much-smaller America West merged with–and took effective control over–a moribund US Airways.
Consumer issues: The America West–US Airways team clearly understands how to concoct a merger, but they earn no better than a “C” for running an airline. The current US Airways offers an uninspiring product and is totally non-innovative. It hasn’t even caught up with American, Delta, and United in offering a semi-premium economy option, and its regular economy product is the usual cattle car. Some consumer advocates fear that loss of another separate large “legacy” line would also lead to higher fares, a fear that US Airways’ pricing policies at its big Charlotte hub would tend to justify. All in all, consumers would probably fare a bit better in a merged airline managed by the American team, but they’d fare better still if this merger doesn’t happen.
This airline might make more sense. It’s quite a bit smaller than US Airways, but its Seattle hub and West Coast routes would plug some major geographical gaps in American’s route structure. Airline historians cite, however, that American previously “wasted” its two previous West Coast acquisitions, Air California in 1987 and Reno Air in 1999, as well as its buyout of TWA in 2001.
Consumer issues: Alaska typically earns higher marks in customer surveys than American, although it’s hard to see quite why: Both its economy and first class products are unremarkable. Overall, a merger with Alaska would seem to be the least-worst merger scenario for consumers, generally, although Alaska’s current customers might not think so.
New to the mix, a JetBlue merger would be a long shot. Its main attraction to American is probably its strong hub at New York/JFK, a very important airport in a very important domestic market where American currently is playing third fiddle to Delta and JetBlue.
Consumer issues: A takeover by American would be a disaster for JetBlue’s customers. Presumably, JetBlue’s industry-leading legroom, in-flight entertainment, and free first checked bag would be lost to American’s regular cattle-car economy.
The allure is potentially the same as Alaska’s: a strong hub at Denver that plugs a big gap in American’s national coverage. It’s hard to see much beyond that.
Consumer issues: As with Alaska, Frontier’s customers seem to like it better than they like American, but they’d gain access to a much larger network. Probably a draw.
This option would seem to be a “just because it’s there” nomination; it’s far too small to strengthen American in any meaningful way. American could surely use a dose of Branson hype, but the more likely result would be a dulling-down for Virgin American.
Behind the Merger Pressure
Many industry pundits are claiming that American can’t survive without a merger, but to me, that’s not quite the case. Darryl Jenkins, the industry pundit I most admire, has argued quite convincingly that a post-bankruptcy American could do quite nicely, thank you, without a merger. To understand the merger pressure, you have to follow the money:
Wall Street strongly supports the merger. The pro-merger mavens base their case mainly on the predicted increase in equity value resulting from a merger, whether or not this prediction is based on any market reality. And, of course, the investment bankers, lawyers, and consultants involved in the merger process would make big bucks regardless of the long-term outcome.
American management’s latest stand is probably pre-emptive, trying to lessen the pressure for a merger before the line exits bankruptcy. The reason? The top execs stand to rake in really big bucks if the line comes out without a prior merger.
Thus, the really important players (managements, financial types, and the merger midwives) see some really big money coming out of just about any merger, whether it makes long-term sense or not. And if a merger is not beneficial to consumers, so be it.
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