When two major airlines merge, the new chief executive will want to put his stamp on the newly formed operation. But what will happen in the merger of American and USAirways? Guest columnist Tom Bacon sheds some light on the matter

So after more than a year of talking about it, in February American and USAirways announced an agreement to merge. And the chief executive of USAirways, Doug Parker, will be at the helm.

Many pundits have discussed the clash of cultures between staid American and more iconoclastic USAirways.  They predict the ouster of many American executives in the new combined team under Parker.  After all, United executive ranks are disproportionately Continental, in recognition of the background of the United CEO, former Continental CEO Jeff Smisek.  Wouldn’t Parker want to stay with ‘his guys’?

I don’t think so.  Certainly, Doug will want to keep many from his team but I expect he will retain much of the American team as well. Is this possible?

Unlike the United/Continental merger, where Continental had been successful both domestically and internationally, USAirways is relatively small in international affairs – international sales, anti-trust immune joint ventures, international code-sharing, and global alliances.  American brings strengths in Europe, Latin American and the Pacific that have no equal at the largely domestic oriented USAirways.

For year-ended third quarter 2012, international was 55% of American’s revenues while it was only a quarter of USAirways’ total revenue  – a much smaller proportion of a much smaller airline.  American’s international revenue for 2012 was 75% of USAirways’ total revenue and three times its international revenue.  In Europe, American’s revenue is 50% larger than US but in Latin and Pacific its revenue is many times that of the smaller airline’s revenue.

In fact international is a big part of the ‘end-to-end’ combination that is the basis for the merger and much of the resulting synergies. 

However, USAirways’ strategy, that has proven successful for them domestically, will not work in the new expanded international sphere they are now entering.  American itself has seen at least three ‘end-to-end’ acquisitions that have failed when it didn’t acknowledge that its own strategy didn’t work as well in the new markets (Reno, AirCal, TWA).  Since international is such a different business, it behooves Parker to keep the international expertise that American offers.

International is different from US domestic in most aspects of the airline commercial operation. Let’s take a look at how:

1.  Fleet and product definition

Of course, the international fleet and inflight product (hard and soft) are radically different from the domestic product.  For example, American now offers state-of-the-art international first class seats and an inflight lounge, features that would not work in the low-fare domestic marketplace. The premium product is much more important internationally – the combined American/USAirways will be competing against outstanding products from both US and international carriers that require them, too, to invest heavily in product.

2.  Route planning and scheduling

The US skies were deregulated in 1978 while much of international flying is still subject to regulation.  International route planning has a regulatory element to it that is not present in the US domestic.

In the US, at least, partially in response to low cost competition, airlines have perfected scheduling to achieve high utilisation of aircraft, facilities, and manpower. However, there are other considerations. When American acquired Latin American route authorities from Eastern, the schedule guys frowned on the low-utilisation schedule to/from Brazil that required airplanes to sit on the ground in Brazil for an entire day, not generating any revenue.  We immediately scheduled a day-time trip back from Brazil in key markets.  This, unfortunately, didn’t prove attractive to the marketplace and much of the Brazil flying is still done today with an ‘inefficient’ schedule.

3. Sales, marketing and distribution

USAirways doesn’t have to worry as much about marketing to different cultures in different languages as they will with a $15B+ international division.  And there are unique barriers to international distribution, for example, not all Latin American travellers use credit cards.  American and other international airlines have set up relationships with foreign-based travel agencies and banks to facilitate purchase of airline tickets throughout Latin America, which USAirways will need to retain.

Eventually, perhaps, with the growth of OTA’s and penetration of mobile devices, airline sales, marketing, and distribution will be more standardised globally, but for now it is not.

4. Pricing

In the US, there is tremendous transparency in airline fares via OTA’s and travel agencies and airline websites. OTA’s often insist upon ‘full content’ so the fares in all distribution channels are the same.  In international, however, ‘private’ fares are more prevalent and can represent three-quarters of the passengers on any particular route. In the international arena, corporations, travel agents, and groups can each merit “private fares.”  “Point of sale” pricing is often used, differentiating the fares charged for foreign-sold tickets versus US - sold tickets.  The differences in pricing for tickets sold in different countries recognises the differences in currency and the different price elasticity of different markets.

5. Joint ventures, alliances, code-sharing

In addition to everything identified above, and perhaps the most significant learning hurdle for USAirways, will be international alliances and ‘ATI’s’.  In fact, alliances impact all of the above: fleet/product, route planning, sales & distribution, and pricing, since airlines coordinate all of these with alliance partners to gain more passengers together. USAirways, of course, has participated in the Star alliance and has some familiarity with the opportunities.  However, American’s larger international network – and key anti-trust partnerships with British Airways and JAL – provides a totally new dimension to alliances that have no equal at USAirways.

Certainly, airlines like to think they can manage everything centrally…that an airline network, however global, can be run effectively from Fort Worth, Texas, or Phoenix, Arizona and that major decisions on thousands of diverse markets can be made from one conference room.  But Parker is extremely aware of regional differences and will ensure that his new organisation – managing a $35 billion network spanning the globe – will continue to dominate in each of its entities. To do this, he must retain key talent at American that is much more experienced in the international arena.

This guest article was produced exclusively by Tom Bacon is a former airline executive and industry consultant in revenue optimisation. Questions?  Contact Tom at tom.bacon@yahoo.com.