In early April, a slew of
executives from American Airlines and US Airways met in Phoenix for what the
carriers called a "kickoff" event. At that meeting they planted the
seeds for the integration that would follow their proposed merger, which could
close as soon as this summer but take years to fully pull off.
The airlines are at the
departure point. Awaiting requisite approvals, they already have launched an
"integration management office," brushed in broad strokes their
post-merger game plan and brought together groups to guide integration planning
in specific work areas, including sales and distribution.
What lies ahead "is
tremendous complexity," US Airways executive vice president and COO Robert
Isom said last month during a media event in Phoenix. He outlined what could be
a two-year task to integrate a combined workforce of 110,000 people, merge into
one entity 6,700 daily flights to 336 destinations, manage a combined fleet of
1,511 aircraft and tie together more than 700 applications and systems.
American and US Airways
acknowledged that they will benefit from having observed two other recent mega U.S.
carrier mergers: United-Continental and Delta-Northwest.
"There are some
advantages, and we have looked closely at what the other carriers have
done," AA senior vice president and chief integration
officer Bev Goulet said last month.
For example, US Airways and AA's
"adopt-and-go" integration plan is a nod to Delta's approach with
Northwest, and includes the "presumption" that it's easier for the
smaller carrier to adopt the policies and procedures of the larger airline
"unless there's a compelling reason not to," said Isom. The carriers also
aim to "avoid pitfalls others had fallen into" and "build upon
some of the things that had gone well," said Goulet.
The Next Steps
The airlines expect the
transaction to close in late August or early September, with U.S. Department of
Justice approval the "long pole in the tent," according to US Airways
president Scott Kirby. Shareholder approval also is required, but Wall Street's
support was evident even before the merger officially was announced.
Pointing to a complementary route
network and the competitive position of each standalone carrier against Delta
and United, analysts anticipate minimal pushback from regulators.
In the meantime, internal
meetings among integration planning teams will continue during the next few months.
In past mergers, Isom said merging carriers became a single airline 18 to 24
months after final approval. He suggested that timeframe is a solid guide, but
added that "doing it right is the most important thing." As such, setting
a "specific date out in the future is not necessarily a driving
factor."
The Integration Planning Team
Sitting atop the integration
planning team is the "transition committee," which includes AA
CEO Tom Horton, US Airways CEO Doug Parker, Kirby
and Goulet.
According to a March 21 memo
from the latter two executives, the transition committee "will oversee the
total integration, make near-term strategic decisions, resolve integration
issues and allocate resources," with support from the "integration
management office," which is "the primary nerve center for
integration."
Led by Goulet and Isom, the
"integration management office" includes AA managing director of
commercial planning and performance Jim Butler, US Airways senior vice
president of customer experience Kerry Hester, AA managing director of
corporate development Candice Irvin and AA managing director of operations
strategic planning Matt Pfeifer.
The IMO will focus on
capturing merger synergies, "developing the master plan and timeline for
the integration" and working with employees "to implement the design
of the new organization," according to the memo.
Reporting to that office are
29 planning teams that include representatives from both carriers, covering
such areas as airport operations and cargo as well as topics closer to the
managed travel world like sales, revenue management and distribution. A source
said the sales planning team rolls up to AA vice president of global sales
Derek DeCross and US Airways senior vice president of marketing and planning
Andrew Nocella.
"The interdependencies
among those 29 functions is huge," said Goulet, "so we're going to
have to figure out what has to happen first in order for the next activity to
occur. A good example here is the idea of selling US Airways tickets at AA.com.
There's a whole group of people who have to work on that: the pricing folks,
web folks and sales folks."
The companies retained
consultants at McKinsey & Co. to assist in the integration planning.
As of last month, the teams
are in "the planning phase," Isom said. "We're planning, but not
executing. The planning phase is focused on gap analysis. Let's get everyone
together, these 29 teams, and talk about how we do things differently." He
said the next step is "a prioritization phase" in which teams will decide
which merger functions must advance quickly and which can wait.
Guiding Principles
Goulet highlighted several guiding
principles "to successfully execute" the merger. She said the
carriers must keep a focus on the customer and "mitigate" disruption;
give employees the "tools they need"; make "fast, effective
decisions"; prioritize and understand interdependencies so attention is
focused on tasks that "drive a lot more value than others"; and work
to "score some quick hits to give people confidence it's working
right."
Because the integration work
is "going to be done by a very small percentage of folks at the two
companies," Goulet said "everybody has to continue to be focused on
running two great airlines as we move through this process."
The carriers have identified
four broad approaches to tying together systems, procedures and policies. In
some situations, they can remain separate for the first stages of integration;
in other instances, AA and US Airways already use similar approaches, making
integration relatively straightforward. The latter is the case for "the
flight operating system," which "for both carriers is virtually the
same," said Isom. "We know they're connected up in different ways,
and we know there will be some interface issues that we need to deal with, but
for the most part we know there is commonality and there is no need, at least
right now, to introduce new, better, different things that are on the
horizon."
Much of the work, however,
will fall under the principle of "choose, integrate and go," in which
one carrier's approach would be deployed in short order for the other. The airlines
will be "doing things first to integrate as seamlessly as possible, then
try to optimize from there," Isom said.
He acknowledged that the underlying
premise of the principle is to favor AA's approach. "US Airways is about
half the size of American," he said. "For the most part, for
passenger- and employee-facing systems, we're probably going to rely on bigger
carrier systems. There is no need to go out and train everyone. You want to
minimize disruption."
A relatively small portion of
integration work will be guided by a desire to more quickly "harmonize to
best-of-breed," wherein new policies, procedures and systems would be
introduced, executives said. "You'll see a lot of this around product
offerings, policies and certain aspects of amenities," said Isom.
"There are certain things that will produce significant benefit that we
ought to pursue, but we want to keep introduction of new material to a
minimum."
Day One
"Prior to close, we want
to be ready on day one," said Isom. That means "there will be some
switches that will flip, some things that will be different on the legal close
date," which would follow various approvals and coincide with the expected
timing of American's emergence from bankruptcy court protection.
Isom said examples of likely day-one
changes include airport signage "to tell customers where they need to
go" and education efforts to get frontline employees up to speed on
differing policies to address customer issues. The airlines also expect to
quickly harmonize crisis management plans.
While not necessarily a
day-one move, the carriers also plan to quickly access revenue synergies by
enabling shared itineraries and implementing code shares. They also would
promptly combine departments at Dallas/Fort Worth headquarters—AA's current
base—and begin in earnest work on systems selection.
The First Six Months
AA and US Airways in presentation
materials indicated the first six months after the merger closes would be
dominated by "no-regrets" moves. They expect to begin optimizing usage
of some aircraft—putting the right planes on the right routes—and start enabling
frequent flyers to earn, burn and transfer miles for both carriers. The
airlines also expect to harmonize some onboard offerings, focusing on
"easy-to-do stuff" like beverages and inflight food services,
according to presentation slides.
Isom said he expected US
Airways during those first six months to transition to Oneworld from the Star
Alliance. "The game plan would be that soon upon legal close we would be
able tell customers about when US Airways will be a full member of Oneworld and
when the Star relationship will end," he said, declining to offer a more
specific timeframe. "It will not be, I know right now, simultaneous with
legal close."
Meanwhile, the carriers
expect to begin jointly addressing the corporate market in relatively short
order after the transaction closes. Based on background discussions, they initially
would focus not on introducing to corporate clients new policies, sales
strategies or contracting procedures, but instead tying the sales forces
together and working toward a singular offering.
One source indicated that AA
and US Airways in early 2014 may unveil a more formalized combined offering for
corporate clients. Sources acknowledged that certain circumstances, such as corporate
contract renewals, could require more immediate attention. Those would be
managed on an ad hoc basis.
As previously reported, there are notable differences
in how the airlines approach the corporate market: AA uses Prism to structure
and manage corporate agreements, while US Airways uses an internal system; AA
is active in antitrust-immune joint ventures with British Airways and Iberia on
the Atlantic and Japan Airlines on the Pacific, while US Airways has taken a
loner approach to international sales; AA has a long history of deep
entrenchment in the corporate and travel management marketplace, while US
Airways backed away from the sector immediately after its 2005 merger with
America West—though it has since taken steps, with some success, to re-engage Corporate
America.
As with other processes, executives signaled a willingness
to defer to AA's approach in the corporate market.
'Functional Integration'
Even if the first six months
don't test the carriers and their respective customers, the next six months
most likely will. Though the airlines will continue to operate separately,
they'll begin working on reservations system migration—"we'll be very
deliberate in our approach there," said Isom—and launching a single
website. The latter is "one area that is open for harmonization around
best practices," Isom added. "There will be aspects of the web that
we want make sure we get the best of both worlds. There is functionality that
US Airways offers today and functionality that American offers today that would
really be great on a combined basis."
In past airline mergers,
"there has been a sizable impact on the traveling public, and it came
about with res migration," Isom said. That was the case with US Airways
and America West, and more recently with United and Continental. Even Delta and
Northwest—a merger remembered more for successes than failures—brought about a
"four-month period when their arrival performance was impacted," he
noted.
Unlike the approaches in the United
and America West cutovers, Parker on the day the AA-US Airways transaction was
announced said that he anticipated shifting to AA's reservations platform.
AA vice president of global
sales Derek DeCross told The Beat in
February that American continues "down the path" of its own res
system upgrade to "make sure we come out with a product that's world-class."
The airline in October 2012
extended by at least two years to June 30, 2016, the expiration date of its
passenger services deal with Sabre. As part of the settlement of its lawsuit
with Sabre, AA also agreed to give the travel technology firm an unspecified
period of exclusivity to negotiate a new res system contract.
Becoming One
From the dates their
transactions closed, it took about 14 months each for United-Continental and
Delta-Northwest to obtain single operating certificates from the U.S. Federal
Aviation Administration.
This task, like reservations
system migration, is instrumental in tying carriers together.
For United, work began even
before its transaction with Continental closed, involving "a rigorous
18-month process of aligning operating policies and procedures" and
"a team of more than 500 employees from both carriers," according to
United. That team "streamlined more than 440 operational manuals, programs
and procedures down to approximately 260 manuals for the new United—a process
that involved roughly 2,000 changes."
It's a good indication of the
challenge ahead for AA and US Airways.
Achieving a single operating
certificate will kick off the final optimization stage, as one presentation
called it, through which the carriers truly become one. After that point, "You
can really go out and start waving the flag" of a single carrier, Isom
said. At that point, the new American can deliver "a single workforce
across all groups, a brand that is out there in front leading the way, that is
truly one, then, ultimately, we'll have a product that is consistent."
Based on projections, all that should be wrapped
up by September 2015.