American-US Airways Integration On Track

by Trefis Team
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AAL
American Airlines Group
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American Airlines (NASDAQ: AAL), which emerged from bankruptcy through a merger with US Airways on 9 December, 2013, has been making steady progress in consolidating the operations of the two carriers. While there have been a number of mergers in the US airline industry over the last decade, the success of these deals is highly dependent on the efficiency of their integration process. To successfully achieve its integration plans, American Airlines will have to overcome several challenges such as obtaining a single operating certificate for its flights and IT systems, consolidation of a seniority list for all its pilots, and integration of frequent flier programs, etc. In this article, we will discuss the developments made by American Airlines on the path to integrate the operations of the two carriers. We currently have a price estimate of $53 for American Airlines, which is in line with its current market price.

See our complete analysis for American Airlines Group Inc.

Major Accomplishments since 2013

The merger of American Airlines and US Airways in 2013 created the world’s largest airline in terms of traffic measured by revenue passenger miles (RPMs) and available seat miles (ASMs).  In January 2014, the merged entity began offering enhanced connectivity to their respective networks through a code share agreement, which enabled the two airlines to sell tickets on each other’s flights. This enhanced passenger convenience as it allowed them to combine flights operated by both the carriers and also ensuring seamless transfer of bags between flights. In March 2014, US Airways opted out of the Star Alliance to affiliate itself with OneWorld Alliance, which was founded by American Airlines. Consequently, it entered into code share agreements and reciprocal frequent flyer programs with the members of OneWorld Alliance.

The cargo divisions of the two carriers were also integrated under a single cargo air waybill, resulting in one of the largest air cargo operations in the world. In addition, the airline made changes in its meal offerings and mealtime windows to align the meal services of the two carriers. The carrier reached an agreement with the various work groups, particularly the pilots and the flight attendants. By the end of the year, the two airlines had co-located their operations at 75% of the airports where they operate jointly. To top it all, the $36.7 billion airline announced a $2 billion investment in aircraft cabins, Admirals Club lounges, and international in-flight Internet on 9 December 2014 to mark the one-year anniversary of the merger.

US Airways’ Dividend Miles program merged to American’s AAdvantage

After almost a year of constant efforts, American Airlines has finally announced the integration of US Airways’ Dividend Miles program with its existing AAdvantage program which will take effect from 28 March, 2015. The Dividend Miles’ accounts, along with their mileage balance, will be merged into a new or an existing AAdvantage account. Under the integrated program, the members will be categorized into three elite segments – Gold, Platinum, and Executive Platinum – based on miles or segments traveled. The following table depicts how the elite segments of Dividend Miles program will be integrated into the AAdvantge program.

Status in Dividend Miles Program Status in AAdvantage Program Points to be earned
Silver Preferred Gold 25,000 miles or 30 segments
Gold Preferred Platinum 50,000 miles or 60 segments
Chairman’s Preferred Executive Platinum 100,000 miles or 120 segments

However, the upgrade policy for the two carriers will continue to differ until the reservation systems are fully integrated. American Airlines will offer its Gold and Platinum members unlimited, complimentary upgrades on flights of 500 miles or less and will allow the use of earned miles or purchased upgrades for flights over 500 miles. Executive Platinum members will receive unlimited complimentary upgrades on all American Airlines’ flights based on availability. On the contrary, US Airways will offer unlimited, complimentary upgrades to all its members and a companion traveling with them in the same reservation.

Prior to the merger, American’s AAdvantage had over 70 million members, while US Airways’ program had about 30 million members. The integration of the two programs will create the biggest loyalty program in the industry with roughly 100 million members (ignoring any duplicate accounts). As American Airlines continues to award points on the basis of miles or segment flown, its frequent flier program will have an edge over the loyalty programs offered by large US carriers such as Delta (NYSE: DAL) and United (NYSE: UAL) that started awarding points based on the amount spent on tickets, penalizing the passengers who accumulate points by traveling on cheaper flights.

Single Operating Certificate (SOC) is on its way

A SOC is a major step in the integration process of this merger as it will align the operating policies and procedures of the two carriers and help to determine the best policies for the combined airline. As a result, American Airlines has been working closely with the Federal Aviation Administration’s (FAA’s) Certificate Management Offices and the assigned Joint Transition Team to obtain this certificate. Though the airline did not expect to receive the certificate before the middle of 2015, its consistent efforts have fast-paced the process.

Last week, the FAA announced that the carrier would be granted the SOC on 8 April, 2015, which would allow American Airlines and US Airways to temporarily operate all their flights under the American Air Carrier Certificate – AALA025A. While it will not have any impact on the operations seen by the passengers of the airlines on the  majority of their flights, maintenance and dispatch procedures will converge as a result of this certificate. The certificate would be appropriately amended once the two airlines are fully merged into a single corporate entity.

Integration of Reservation systems may take longer than expected

Subsequent to receiving the SOC, consolidation of the reservation systems is the most important, yet most challenging, job ahead of American Airlines. Each of the two airlines have approximately 700 systems, which means the technical teams would have to integrate about 1,400 systems to deliver a unified reservation system for the combined airline. The carrier plans to retain American Airlines’ legacy systems as they are larger, have higher scalability, and will require less training for employees and customers. While the airline is making efforts to expedite the integration process, given the complexity of the task, the consolidated reservation system will not be ready until the end of the year.

Consolidated seniority list for pilots is expected by end of year

There has been a lot noise about the consolidation of a seniority list of pilots of the two newly merged US airlines. In January 2015, a panel of arbitrators appointed to consolidate this list acknowledged that since the seniority list prepared after the America West-US Airways merger in 2005 was not implemented before the American-US Airways merger in 2013, the seniority of the pilots of former America West should also be reviewed under the current integration process.

So now there will be three seniority lists of pilots that will be integrated through arbitration. The hearings are scheduled to commence on 29 June, 2015, and continue until mid October and will be attended by US Airline Pilots Association (USAPA) Merger Committee, West (America West) Merger Committee, and AA Pilots Seniority Integration Committee. The deadline to finalize the integrated seniority list is 9 December, 2015, the day when the merger completes two years.

Retaining its Headquarters at Fort Worth

Suspending its plans of relocating its headquarters, American Airlines has decided to retain its corporate office at Fort Worth, Texas, and move all its new employees from around the country to its existing campus. The carrier currently owns a 1.4 million-square-foot corporate campus, which comprises two headquarter buildings, holding about 1,000 employees. While the airline has not yet decided on the exact number of employees to be relocated to its campus, it aims to consolidate most of its operations team into the Fort Worth facility. American Airlines further plans to develop its existing 124,000-square-foot integrated operations center into a new facility for its technical operations group, which is currently scattered throughout the US.

Over the last year, the airline has moved more than 300 management level employees to its campus and is constructing a new two-story, 149,000-square-foot integrated operations center, which will accommodate approximately 1,400 employees. The construction of the new center is expected to be completed in the third quarter of 2015.

Conclusion

American Airlines’ progress in integrating the two carriers has been comparable to the recent mergers in the industry led by Delta and United. The airline has efficiently integrated the frequent flier programs of the two airlines and has made strong headway in receiving the SOC. Based on the company’s current timelines, the consolidation of the fleet and reservation systems, and seniority list for pilots, is all expected to conclude by the end of the year. While there is still a long way to go before the two carriers are fully merged, American Airlines seems to be on track to meet the December deadline for the full integration of the merger.

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