Keeping American Airlines up in the air
– An appeal to learn from past crisis, competitors and the best
After the attacks of September 11, 2001, airlines got into serious trouble and were forced to cut costs and routes all over the world quickly. Some airlines in the US that did not have enough financial resources went into Chapter 11 protection in order to cut costs faster than would otherwise be possible. One of the companies that survived this difficult time without such protection was American Airlines.
The US airline market has been consolidating for several years, which is a healthy development. Until recently, there were four big US carriers, which is probably too many for the size of the market, as there might only be two that can operate profitably in the long run. This consolidation is an international development, although it will probably take longer in Europe because some airlines are governmentially backed (AirFrance/KLM, Alitalia) and because Europe consits of many countries with different laws, which stretches the merger process. Still, there are signs that, even in Europe, the consolidation process has begun. Hungarian Malev and Spainair are bankrupt, Olympic is almost there, Alitalia has never been very profitable, and Air Berlin survives only because Ethiad is backing it up financially. In the long run, we will see some substanitial consolidation that might end in Lufthansa’s and AirFrance/KLM’s dominating the European market.
Even though all big US airlines seem to run into trouble at one time or another, their management does not seem to learn from the industry’s mistakes. Compared to non-US airlines like Lufthansa, Singapore, and or Emirates, American’s finances are much worse.
Currently, AMR, the group to which American Airlines and American Eagal belong, operates about 900 airplanes, serves more than 250 airports in about 50 countries, and employs about 88,000 employees. In December 2011 alone, the company lost US$ 904 million.
Once a strong airline that survived this serious crisis on its own account, American was forced to file for chapter 11 protection in November 2011. Since it did not use its time and financial power to restructure the company to make it more competitive, its competitors have lower costs and can operate more profitably. What followed had to happen since American didn’t adapt to its competition’s lower cost structure. The fleet is much too old, maintenance costs and labor costs are too high to compete efficiently. Therefore they filed for Chapter 11 at the beginning of 2012.
In this case, leading the company into Chapter 11 made sense, as it will allow management to renegotiate employees’ contracts, which would otherwise be difficult given the traditionally strong unions in the airline industry.
Possible ways out…
US Airways has been looking for a partner for a while because it is at risk of not being able to keep up with other airlines that have merged over the last couple years. A merger could bring significant advantages in terms of providing routes to customers and cost reductions. Currently, US Airways is competing with American on numerous routes, lowering earnings for both of them.
A merger with Delta could be difficult because both American and Delta are (along with United Continental) among the three largest airlines in the US. A merger would probably not be allowed by US Department of Justic (DOJ).
A takeover by TPG would draw the DOJ’s attention, and such a takeover would call for some significant restructuring and a risky turnaround plan. However, if it stays alone, American will not be able to profit from the economies of scale it would if it merged with another airline.
American’s current CEO, Tom Horton, does not believe that a merger with another airline would benefit American or its shareholders, but I tend to disagree. The stakeholders would certainly profit from a merger if it lifts the airline into first or second place in the list of the largest…