When Doug Parker moved into the CEO’s office at American Airlines a year ago, he was ready to merge two carriers into the largest in the world and get 100,000 employees working together.
But there was one problem. Parker’s executive office on the northeast corner of the sixth floor at American’s headquarters was closed off by itself, down a small hallway with a single door at the end.
“I was in here by myself, and the only way I’d see anybody was if they really, really wanted to come see me, because it wasn’t welcoming,” Parker said.
So he asked American’s facilities department to tear down walls and take out a private shower and bathroom to create an open entrance. “There was no way you randomly popped in here, but now I can see people as they walk by.”
In the year since the merger of American and US Airways was completed, Parker and the members of his management team — most of whom came from US Airways — have focused on getting employees from the two airlines to work together.
They have produced record profits and revenue in 2014, have seen the stock price double to more than $50 a share, and have had few operational hiccups as the carriers instituted code-sharing and moved airport facilities.
But they caution that first-year merger goals were relatively easy to achieve and that 2015 will be crucial for American Airlines Group.
Next year, the company expects to receive its single-operating certificate from the Federal Aviation Administration, combine its 100 million members into one frequent-flier program and merge two computer reservation systems onto one platform.
On the labor front, American is in arbitration with its flight attendants union and in contract negotiations with the rest of its unionized work groups, trying to reach joint contract agreements with each in 2015.
American will also spend $2 billion over the next three years on new airplanes, new seats on older aircraft, more Wi-Fi and entertainment options, and a refurbishment of its Admirals Clubs.
“Of the important events in 2014, I think we’re making strides as a team, which is really important, but we have a lot of bigger things to accomplish in 2015,” Parker said.
Analysts give American high marks for its first year, saying the integration has been much smoother than the 2010 merger of United Airlines and Continental Airlines. And American is already seeing financial benefits from having the largest route network, they say.
“The US Airways folks have done a credible job of not just assuming the position of authority but rather motivating their primarily American employee contingent to perform at a higher level and put away the disappointments of what could have been the rhetoric of an apparent takeover and pull for the greater good,” industry analyst Robert Mann said.
A year in review
Keeping 6,700 daily flights on time while integrating two airlines can be difficult.
But less than a month after the merger closed, American and US Airways announced the code-sharing agreement, making it easier for customers to book flights on both airlines. The company also quickly implemented policies that gave premium customers priority boarding and free checked baggage on both carriers.
“These guys have maintained operational integrity through the merger process and it’s really hard to find a lot of fault with what they’ve done,” said Bill Swelbar, an airline analyst at the Massachusetts Institute of Technology. “They have learned from other mergers and to their credit, they have put it into place and tried to address it so they don’t make the same mistakes that have been made in the past.”
As part of its merger agreement, American was forced to divest takeoff and landing slots at Washington, D.C.’s Reagan National Airport and New York’s LaGuardia Airport last spring. A fight broke out among Southwest Airlines, Delta Air Lines and Virgin America for American’s two gates at Dallas Love Field. The Justice Department required American to give them to Virgin America.
The company began moving employees from US Airways’ headquarters in Tempe, Ariz., to American’s home in Fort Worth. American also announced that it would close a US Airways operations center near Pittsburgh as it broke ground on an integrated operations center in Fort Worth in July.
The company has added 1,500 workers in North Texas since merging and now employs about 25,000 locally.
With fuel prices dropping, fares remaining stable and planes flying with full loads, American has generated $2.29 billion in profits for the first three quarters of the year. Wall Street analysts expect a solid fourth quarter as well.
Investors have liked the job that Parker and his team have done since American emerged from bankruptcy, doubling the stock price. The company also announced its first stock dividend in decades.
“We did a really nice job in 2014 of doing what we set out to do,” Parker said. “2014 was a year of a lot of important steps in what is at least a two-year process.”
By the middle of the year, American seemed to be firing on all cylinders, with revenue exceeding expectations. And union employees at American want to share in the good fortune.
In negotiations with its flight attendants, the company offered pay raises that exceeded 12 percent in some cases. However, the tentative agreement did not include a profit-sharing plan, and flight attendants rejected the deal in November by 16 votes.
The rejection “was an eye-opening event because when you’re surprised like that, you have to stop and wonder what you missed,” Parker said. “What we missed is the history and that we hadn’t built up enough history with the team. When you stop and think about it in those terms, to be honest, we haven’t been working together that long.”
The flight attendants union and the company presented proposals to an arbitration panel last week, disagreeing on three items: a “me-too” clause for profit-sharing, a “me-too” clause for healthcare plans and the date when wage rates should take effect. The panel is expected to rule by February and implement a contract that will cover both American and US Airways flight attendants.
American “won’t overcome years of anchored mistrust from both [American] and [US Airways] employees, but the offers that [American] extended to pilots and flight attendants were above what needed to be offered given the backstop of arbitration, agreed to by [American] labor groups,” Wolfe Research analyst Hunter Keay wrote in an investor note about labor relations at the company. “It’s too early in the relationship to expect that there won’t be arguments.”
The company is still negotiating with its pilots union, having offered immediate 18 percent raises if a new contract is approved. The Allied Pilots Association board is scheduled to meet this week to discuss the talks. If the two sides can’t agree, they will also move into arbitration.
Parker said he believes the company can reach joint contracts in 2015 for all work groups, including ground workers, mechanics, gate agents and other union groups.
Analysts say that labor relations are vital to American’s future and that Parker needs to reach agreements that employees feel reward their contributions to the company.
“You can underperform if you’re still at war with your employees,” Mann said. “Even if it looks like a new day, there is a lot of pent-up lack of trust which has to be re-established.”
For customers, American and US Airways still look like separate airlines.
That will change next year with three major integration projects: a single-operating certificate from the FAA, a merged frequent-flier program and a combined reservation system.
Once American receives the certificate, likely in the spring, it can run its networks as one. Also in the spring, American plans to migrate all of US Airways’ Dividend Miles members into AAdvantage and combine accounts for customers with miles in both programs.
In the fall, the company will move to one reservation platform, shifting over all the data from its US Airways and American systems. When United and Continental made the switch in 2011, the computer systems crashed, leading to thousands of canceled flights and stranded passengers. America West and US Airways had similar problems in 2007 when their integration caused check-in kiosks to crash across the country.
“Reservation systems are the backbone of the airline,” Swelbar said. “They have to find a way to get all of that technology to talk to one another.”
Parker acknowledges that once those three projects are completed, the airline — from the customer’s perspective — will essentially be integrated. And to keep customers coming back, American plans $2 billion in product investments over the next three years.
The company will take delivery of 112 new planes in 2015, retiring older MD-80s and putting its first Boeing 787 Dreamliner into service.
It is also retrofitting its Boeing 757s on trans-Atlantic and Latin American flights with fully lie-flat business-class seats and new main cabins. The Airbus A319s will also be retrofitted with new seats and power outlets throughout the cabin.
At its airports, American plans to upgrade its Admirals Club lounges with new food options and renovated restrooms and showers. And at Dallas/Fort Worth Airport, American will introduce its Cadillac pickup service for premium customers.
“One of the things we’re going to do in 2015 is make sure we’re improving the product and investing in the product and not just working on integration,” Parker said.
Andrea Ahles, 817-390-7631