American Airlines

December 7, 2013

After merger, American Airlines faces long task of integration

It could take two years for American’s new executive team, composed of leaders from US Airways, to pull the two airlines together.

For Doug Parker, who spent nearly two years fighting for a merger between American Airlines and US Airways, it is time to celebrate.

On Monday morning, Parker will host an employee rally at a hangar at Dallas/Fort Worth Airport where he will ring the bell to open trading on the Nasdaq stock exchange as the newly merged American Airlines begins its first day of trading.

Shortly afterward, American’s new chief executive officer will begin the long, hard work of making the world’s largest airline run smoothly with 100,000 employees and 1,500 aircraft.

“All those kinds of things that customers expect, we have to get them done and get them done quickly,” Parker, the longtime leader at US Airways, said in an interview last week.

With the merger, American once again moves past United Continental and Delta Air Lines to reclaim the No. 1 spot in the industry.

However, becoming the biggest also brings huge integration challenges. Parker and his new executive team must figure out how to combine computer systems, internal policies and a unionized workforce. And they must bring the airlines together without interrupting 6,500 daily flights and with minimal impact on customers.

The process could last another two years, with American and US Airways flight schedules to continue until the US Airways name eventually goes away.

“The challenge for 2014 will be to deliver on what we told everyone that we would,” said Scott Kirby, American’s new president. “We really just need to deliver on all the promises that we made.”

That includes obtaining the $1 billion in merger synergies that Wall Street is expecting and working on new contracts with labor groups.

Industry analysts say they hope the new American has learned from problems that have plagued other airline mergers. In 2012, the newly merged United Continental saw its passenger reservation system go down for days during the integration process, delaying flights for hours and stranding passengers.

“The new leadership for American will need to be good listeners. They will need to ask the right questions,” said Hudson Crossing airline analyst Henry Harteveldt. “American has a terrific opportunity to proceed and win, but they have to want to win. They have to do what’s needed.”

Challenges ahead

The new executive team at American knows firsthand that integration doesn’t always go smoothly.

When America West and US Airways combined in 2005, the airline was losing luggage at its Philadelphia hub, and only two-thirds of its flights were departing on time. A renewed focus on departing on time and an incentive program that rewarded employees for on-time operations helped the airline improve. In September, over 88 percent of its flights departed on time.

“We know some of what went wrong in our own merger [with America West] operationally,” Kirby said. “We feel pretty confident that we can do a much more effective job on integration than before.”

One of the pitfalls in any corporate merger is technology. Each airline has about 750 computer applications and systems, and integrating all 1,500 to work for one carrier is challenging. The management team has already decided to use most of American’s computer systems.

“We’ve really tried to take the path of least resistance,” said Maya Leibman, American’s chief information officer. “If the system is used by more customers or by more employees or can scale up to handle additional volume, that is what our decisions are all about.”

Leibman said some programs operate independently and can be changed quickly while others may interact with data from several systems. For example, the carrier will likely operate two maintenance programs for the next couple of years because of the complexity of the systems that deal with a variety of aircraft types.

Unlike United Continental, which has had several technology integration issues, industry analysts expect American’s transfer to have only a few bumps in the road.

“American has been a technology leader for decades, and they have kept the American IT team largely intact, which suggests to me that the transition should be smoother,” said Bill Swelbar, an airline researcher at the Massachusetts Institute of Technology.

Analysts say American may also be ahead of the game on labor issues. Before the merger was announced, Parker negotiated conditional labor agreements with American’s three largest unions and worked on memorandums of understanding that would govern integration for the unions.

But the unified front may be fading as labor groups now battle to represent the various employee groups. In November, the two flight attendants unions publicly argued over which should lead flight attendants and have stopped integration talks.

“They’ve got to find a way to bring the labor groups together without conflict because no company can be successful unless management and labor are chasing the same goals,” said Bob Crandall, the former longtime American chief executive.

Parker said he believes that the carrier can negotiate new contracts with all its labor groups within two years. And after the merger closes, he plans to take time to meet with American employees, unionized or not.

“You just have to be transparent with people,” said Parker, who held monthly meetings where US Airways employees could ask any question. “We are committed to making sure we have good and open relationships with our employees.”

Day One

After two years in bankruptcy, American is ready for a fresh start.

Gone are the old AMR and US Airways shares, which closed at $11.39 and $22.55, respectively, on Friday.

American’s new stock, with the ticker symbol AAL, will be distributed 28 percent to US Airways shareholders and 72 percent to American’s creditors. The company’s name will be American Airlines Group.

With its headquarters remaining in Fort Worth, American will have about 24,000 employees in North Texas. And some will be celebrating with a bigger paycheck.

As part of an agreement signed with the two pilots unions during merger talks, pilots will get a pay increase Monday. Parker said all US Airways employees will also get pay raises on Day One.

American pilots, flight attendants, mechanics, fleet clerks and other workers will also receive shares in the new company, some of which were negotiated in return for contract concessions while the company was in bankruptcy.

But not much else will change with American or US Airways immediately.

“Given that we’re closing right in front of the holidays, we’ve chosen not to put a lot of change on the two airlines, for either our customers or our employees right in front of that,” Parker said. “Day One, things will look pretty much the same.”

In the first quarter

Once the airline gets through the busy holiday travel season, American executives plan to roll out customer initiatives.

On Jan. 7, it hopes to announce reciprocity between its two frequent-flier programs, AAdvantage and Dividend Miles. That will allow loyal customers to earn and use frequent-flier miles on either American or US Airways flights regardless of which program they belong to.

“The kind of things that knit the airline together from a customer perspective, those are some of the first things we will try to tackle,” Robert Isom, American’s chief operating officer, said in an interview last week.

The new carrier will work to ensure that elite frequent fliers have access to both Admirals Clubs and US Airways Clubs, he said.

By the end of the first quarter, the company expects to have code sharing on flights for both airlines as well. Code sharing will enable customers to buy a ticket for an American flight using the US Airways website and vice versa.

And US Airways will leave United’s Star alliance to join American’s Oneworld alliance this spring. Kirby said looking at international growth opportunities is one of the airline’s highest priorities shortly after the merger closes.

American previously announced plans to launch service from DFW to Shanghai and Hong Kong next summer, and Oneworld partner Qatar Airways said it will start nonstop service between DFW and Doha in July.

“Having an effective partnership with the rest of our Oneworld partners, it is something critical,” Kirby said.

Keeping operations running smoothly at DFW during the airport’s terminal renovation program is also crucial. Isom said he loves what American has done in helping customers move quickly from drop-off to check-in and boarding at its renovated section of Terminal A.

“My hope is we can take some of what is being done here and use that throughout the rest of the system,” Isom said.

Down the road

Making two airlines work as one will take longer than a few months.

Some milestones are more than a year off, including the largest technology integration, the switch to one passenger reservation system.

Isom said he expects it to take 18 months to two years for the airline to receive a single operating certificate from the Federal Aviation Administration, which is required before all flights can operate under the American banner. It will also take time to co-locate American and US Airways gates at various airports.

In Phoenix, American will move its gates from Terminal 3 to Terminal 4 early next year since connecting passengers have no way of moving between terminals without leaving the secured area. While Isom said he’d like to quickly combine operations at Los Angeles International Airport, where the airlines are in different terminals, it will likely be more than a year before the airport has enough space to accommodate them together.

Keeping flight operations running on time during the transition is also crucial.

“We are going to be a carrier that is known for reliability, and that is going to be part of the fiber of this company,” Isom said. “We’re going to do some things that take a look at starting the day off right and making sure that everybody and all equipment is ready to go.”

Even though American and US Airways won’t operate as a single airline for a couple of years, Parker said, it’s satisfying to see the merger officially close Monday.

“This was all about an effort of trying to get our airline in position to be successful and allowing our employees to work for an airline where they knew they could build their careers and know the airline was going to be there for them,” Parker said.

“It feels really good to accomplish that.”

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