The proposed merger between America West Airlines and US Airways either could bring another major player into the fold for many corporate accounts or diminish both brands in buyers' eyes if the plan becomes plagued by difficulties inherent to domestic airline consolidation. Should integration proceed in the coming months, US Airways' East Coast and transatlantic operations would be salvaged rather than liquidated, as speculated for months, and America West would stake its claim as a major force in a reshaped domestic aviation market.
Still competitors, the airlines said it is far too early to detail any corporate sales integration. Other bids for all or parts of US Airways could surface before the non-exclusivity period expires at the end of the month and any approval process would be lengthy. US Airways is scheduled to emerge from bankruptcy protection this fall, when it and AWA would face the daunting task of addressing disparities in customer service, sales, distribution, back-office systems, reservations platforms and labor contracts. Nevertheless, America West chairman Doug Parker claimed the merged entity would become "the first national low-cost hub-and-spoke network carrier." Despite flying with different operating certificates for at least two years, "from a consumer perspective, it very quickly will look like all one airline."
If constructed as planned, the combined airline named US Airways—domestically ranked fourth in sales and fifth in capacity—would be based in AWA's Tempe, Ariz., headquarters under Parker's leadership. With primary hubs in Charlotte, Philadelphia and Phoenix, the network would combine US Airways' strong East Coast presence, transatlantic services and brand recognition with America West's low-cost, low-fare and occasionally profitable domestic model. It will coordinate schedules, marketing and frequent flyer programs "as soon as possible."
The renewed US Airways also would maintain domestic United Airlines and worldwide Star Alliance affiliations, becoming the only current domestic LCC to participate in a global airline alliance.
"If they leverage their advantages, they could be a strong player in the eyes of corporate buyers," said Brendan Hickman, vice president of travel and transportation consulting for Teradata/NCR, a data and analytical applications service provider to the aviation industry. "They have a strong brand both domestically and internationally and the ability to provide a low-cost means of transportation at differentiated levels of service where appropriate."
Both AWA and US Airways offer premium seating, advance seat assignments and other traveler perks. Rival Southwest does not. AWA and US Airways also offer formalized corporate contracting and Southwest does not—but the future of such efforts is not clear.
"Based on historical airline mergers, we know corporate agreements are usually merged into one agreement," said Rose Stratford, senior vice president, of industry relations at WorldTravel BTI. "Because there is so little overlap, those with a US Airways agreement probably don't have one with America West, so this will certainly give the airlines more scope to work from for their contracts."
In Dallas, for example, AWA is the eighth-largest operator and US Airways seventh, but combined they would rank third and be a viable option for some corporate buyers. "We could not compete against American for the largest accounts, but for the small and mid-tier, we would make progress that we couldn't today," said AWA executive vice president Scott Kirby.
AWA vice president of sales Joette Schmidt added that such benefits would extend to many more markets. "If a proposed merger were to go through, as our network would more than double in size to some very key business markets and corporate-rich areas of the country, corporate sales becomes that much more important to us," she said. "It is less about whether the account is small, medium or large and more about whether it is a good fit for our product and services and whether or not the account manages its travel."
AWA's roster of corporate accounts today is limited by its relative size and leisure orientation. US Airways provides significant lift in many eastern business markets, but has cut corporate sales resources and transitioned to a simplified pricing model—similar to one AWA introduced in 2002.
"At America West, because of the pricing structure we have in place today, published fares are so competitive and last-minute walk-up fares are so ideal for the business traveler," Schmidt said. "That has mitigated the need for corporate discounting, certainly the corporate discounting of the historic level. Regardless of what we do, we will remain competitive."
For now, corporate client relationships at both carriers will proceed as business as usual. "We have been assured that nothing will change in terms of contracts and service and we would be looking at next year before anything does change," said Colleen Guhin, strategic sourcing manager for travel and telecommunications for ON Semiconductor in Phoenix, an AWA client. "My concern is that America West may bite off more than they can chew and become too big. They have been successful because of their size."
While the complementary route networks may form an attractive combination—overlapping at only 38 of 270 current stations—they also present difficulties for two companies with distinct sets of clients and sales strategies. "Neither one, at the present time, is particularly good at understanding who the best customers are," Teradata/NCR's Hickman said. "If they are going to have a sales presence, it needs to be a very intelligent sales presence."
They also must reconcile different distribution philosophies. AWA, for example, has pushed online corporate and agency booking portals for small and midmarket accounts. Though it lists content in all four primary global distribution systems, it does so at a lower participation level than the top six carriers, and therefore outside content-for-discount programs.
US Airways helped pioneer the current spate of major airline-GDS content agreements, called DCA after Sabre's three-year program. US Airways' GDS deals would be the first to expire this autumn if not renewed or replaced.
"They have to emphasize channel optimization, which will pull them a lot more toward portal-based sales," Hickman predicted. "They cannot be a low-cost carrier and absorb all the distribution fees they absorb today."
AWA's Schmidt could not predict future distribution strategies, but said the airline "remains consistent about the need to reduce distribution expense."
As they settle on behind-the-scenes corporate sales and distribution plans, the two airlines also must address customer service issues. Though neither is atop Air Travel Consumer Report charts, AWA has fared much better than US Airways, which has languished near the bottom of the rankings in several metrics.
Those statistics speak to US Airways' slumping reputation, hurt further by deteriorating employee morale, continuing financial losses and highly publicized operational glitches. AWA's Parker and crew, however, ultimately selected the US Airways brand for its broader overall recognition and established international infrastructure, presumably a benefit on more lucrative European routes. "While there has been damage to the brand, it is nothing that cannot be rehabilitated," he said.
US Airways would retain its Star Alliance membership and further cooperate with Air Canada through maintenance and airport handling contracts, as well as potential transborder codesharing. Air Canada parent ACE Aviation Holdings, itself only eight months clear of a bankruptcy overhaul, is among several financial supporters of the deal, having committed $75 million.
Airbus also kicked in a $250 million loan. The combined airline would transition its long-haul fleet to an all-Airbus operation and serve as the launch customer for the Airbus A350 in 2011.
In addition to primary hubs, the new US Airways would operate secondary hubs in Las Vegas and Pittsburgh, with Boston, Fort Lauderdale, New York LaGuardia and Washington, D.C., as "focus cities." It also would include the carriers' existing services to Canada, Europe, Mexico and the Caribbean.
The combined mainline fleet would be 361, down from 419, in addition to 239 regional jets and 57 tuboprops. Most of the affected planes would be removed from service by year-end. The most noticeable flight reductions communicated thus far would be transcontinental routes. US Airways this summer would halve transcon capacity versus last year, while AWA would cut nonstop flights remaining from an October 2003 transcon foray
(BTN, Aug. 25, 2003). "We want to size the coast-to-coast service to accommodate local traffic," Parker said.
In the context of the overall domestic airline industry, a sizable capacity reduction is the preferable outcome of any consolidation. "Fifty-eight fewer aircraft represent a 1 percent decline in domestic capacity, clearly a step, not a leap, in the right direction," said J.P. Morgan Securities analyst Jamie Baker, also suggesting that "one less pricing department is a positive" for overall industry revenue prospects.