Not-so-friendly skies facing the newly merged American
The newly minted American Airlines, now the world's biggest carrier, is trying to reassure passengers that they won't notice any changes because of the merger that created the company -- at least not at first. The road ahead for the airline, however, may not be smooth sailing.
Though the airline and the U.S. Department of Justice, which approved the merger after first opposing it, have argued that it won't lead to higher fares, some industry observers are concerned that's precisely what will happen as merger partners US Airways and American grapple with some huge challenges such as integrating their computerized reservation systems.
"We have seen time and time again that decreased competition leads to an increase in fares," says Bill McGee of Consumers Union, who testified before the U.S. Senate against the deal. "I don't see why things will be different this time. ... We are in too big to fail mode (because) we have never had only four big airlines in the United States."
As McGee notes, the industry's track record in merger integration is problematic. United Continental Holdings is a case in point. Though the multi-billion transaction creating the company closed in 2010, the carrier continued to have problems this year and recently decided to honor $2.50 tickets that its computerized system mistakenly sold. Last year, hundreds of United flights were grounded because of a separate computer glitch.
Brian Kelly, the founder of the consumer website The Points Guy, expects US Airways and American to face the same problems because they have "drastically different back ends." The companies expect to be operating on a single operating system sometime next year.
"No matter what, there are going to be big IT glitches," he predicted in an interview. "The United merger was and still is painful."
American, for its parts, argues that it has learned from others merger integration mistakes. Senior Vice President Beverly Goulet, who is overseeing the integration of the two carriers, told the Fort Worth Star-Telegram that the company is taking a methodical approach to merging its operations so it is "not at all disruptive to the customer."
Though the company is called American, US Airways is calling the shots here. US Airways' CEO, Doug Parker, is heading up the combined carrier, a development that makes Kelly uneasy.
"My experience with US Airways has been pretty atrocious," he said, adding that service on American is better. "Doug Parker is the CEO who tried to start charging (passengers) for water and soft drinks." A spokesperson for the airline couldn't be reached for comment.
Wall Street is positive on the merger, which the carrier estimates will generate $1 billion in synergies by 2015. The companies also have agreed to sell 52 slot pairs at several airports such as Washington's Reagan National, which the government argues will further competition because they likely be sold to discount carriers.
"We have always been skeptical of airline synergy targets but believe the company has significant earnings potential when a single operating certificate is achieved," according to an recent Cowen & Co. research report.