American Airlines and US Airways to Merge

AMR Corp., the parent of American Airlines, and US Airways, have announced that they will merge. The combined airline will be known as American Airlines.

The track record of corporate mega-mergers is not a happy one. Large corporations are complex, and airlines are particularly complex. Integrating two particularly complex organizations, with their disparate systems, workforces, operations and assets, inevitably takes longer and costs more than forecast.

The enduring puzzle of the American airline industry is how companies that sell a useful product with an enduring market, with high barriers to entry for potential competitors, seem to be unable to convert that into a sustainable business model.

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  1. A few thoughts on why US airlines have such a hard time being successful.

    Too many of the legacy carriers are stuck with mindsets (and union rules) that go back to before deregulation. I know that blaming the legacy of regulation sounds like a weak excuse when it ended more than three decades ago but I think that’s part of the reason that companies which never were in the regulated marketplace (Southwest for example) have done better.

    The second issue is that domestic airline travel has mostly become a commodity. People go online and search for the cheapest ticket from Point A to Point B. Like with any commodity business this lowers profit margins.

    It is also far too difficult for one of the majors to go out of business. United spent what, three years in Ch. 11 protection after 9/11? That kind of a system practically rewards failure. American Airlines was the only major never to have gone through Ch. 11 up until last year and as a result they were stuck with a cost structure that was much less competitive than United, Delta or US Airways.

  2. Very interesting insight. But I’m not sure that I understand the problem with airline travel being a commodity business. Many businesses are very successful in selling commodities (example: Walmart). Why not airlines.

  3. Walmart exists in a very different world from airlines. They have an ability to drive hard bargains with their suppliers that almost no other company in the world can match. The largest expense for airlines on the other hand is fuel. AA or United will never be able to strong-arm Saudi Arabia or Venezuela into lowering the cost of oil.

    It’s not just that domestic air travel is like a commodity, it’s that things have changed so rapidly. Fifteen years ago people still used travel agents and a major airline could charge business travelers a thousand dollars for a last minute ticket from New York to Chicago. Today people can compare prices for tickets from every airline in five minutes on their phones. Combine that kind of a market change with intransigent unions, huge fuel prices increases and the million and one other unique challenges that airlines face and it’s no wonder the industry has been suffering so much.

    What really blows my mind is that people are willing to start new airlines in the current US market. I cannot understand how Virgin America was able to find investors back around 2005.

    BTW, I should be clear that I don’t have any special insight into the airline business. I’ve never worked for one and I can’t pretend to have any real understanding of how their insanely complex finances work. These are just guesses and thoughts that I have. Take them for what they’re worth.


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