While, I know its pretty much inevitable, I am not a fan of this $11 billion merger. We know that:

• Merger will be completed by October, 2013
• American will be the world’s biggest airline
• It will have two per cent more air traffic than United Airlines
• AA will have 6,700 flights to 336 locations in 56 countries
• The airline will have 1000 planes
• The new workforce will be close to 100,000
• AMR creditors will own 72% of the combined airline and US Airways the other 28% of the ownership
• The American Airlines name will survive
• Headquarters will be in Dallas/Ft. Worth (US air is currently Phoenix, Arizona based)
• The airline will be part of One World
• Doug Parker of US Airways (and America West before that) will be the new CEO of the combined company
• Current CEO Tom Horton will be on the board as a non-executive until 2014
• Initially there will be nine hubs: Charlotte, Chicago O’Hare, Dallas/Ft. Worth, Los Angeles, Miami, New York JFK, Philadelphia, Phoenix and Washington

I would rather not see this further shrinkage of the US airline industry. This deal means that four mega carriers will control about 85 per cent of the US domestic airline traffic. My preference would be for International Airlines Group (British Airways/Iberia) to merge with American. Yes, it breaches current US airline ownership laws which still limit foreign ownership of US air carriers. It would diminish some trans Atlantic services but would create a very large global airline and maintain some competition in the US market. A market, which has already seen Northwest and Continental vanish.

Some questions from me:

• How long before the Phoenix hub goes. It is effectively sandwiched between the DFW and LAX hubs. It would make sense for traffic to be routed away from PHX in favour of those two AA cities.
• How long before Philadelphia is whittled down in favour of Miami and JFK. US has abandoned Pittsburgh and American exited St Louis
• Will the Reservations system be American’s Sabre or US Airways Shares ?
• Will American keep its brand new livery which will be on 73 planes by the end of 2013?
• Can CEO Parker repair the low American Airlines staff morale?
• Will AA service improve (I put American in the bottom ten airlines I have flown on)

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IAG CEO Willie Walsh has thrown down a challenge following  nine months of losses at Iberia and a 25% fall in third quarter profit for the group. This week he said:  “We want Iberia to be strong and successful. For too long the narrow self-interest of the few has damaged the long-term future for the many. We will not hesitate to take necessary steps to protect the interests of our shareholders.”

It looks like Iberia is going through the same medicine that British Airways went through two years ago.  The immediate changes are:

• Iberia capacity will be reduced by 15 percent next year
• 25 of Iberia aircraft will be cut
• 4,500 jobs more than one-fifth of the total workforce will be eliminated
• short-haul salaries will be reduced to the levels of low-cost carriers,
• unprofitable routes will be suspended
• Iberia Express will take over an increasing share of Iberia’s short-haul flights
• Vueling, Spain’s second largest airline will become a wholly owned subsidiary through a 113million Euro take-over bid for the remaining 54 percent IAG don’t own. Vueling announced last month that it was expanding its network in 2013 to a total of 100 destinations.

The response to Walsh words and IAG announcements by the Spanish UGT general workers union was a statement that “Iberia is being dismantled,”. IAG has already been in conflict with the Spanish pilots union SEPLA over pay and conditions. Arbitration has failed to solve this. I suspect we are going to see some stoppages and difficulties at Iberia .

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The Vanishing Colours of Europe’s Tails

Malév Malaise- Hungary’s flag carrier demise

As a kid, I first started plane spotting when I flew through the airports of  in Europe, Africa and the Middle East. I became expert by the age of six at picking out all of the different tails of airlines. The bright colours of Braniff, the dignified blue of Pan Am, the proud speedbird of BOAC,  the Kangaroo of Qantas and the blue and white S of Sabena all were recognisable instantly. Fast forward forty years, and most of those airlines are gone.

As an adult, I still like looking at those tails and dream both about the carrier and it service and the exotic destinations it connects.   I promise I am not obsessive about my plane spotting.  I don’t make many special trips to the airport, just to watch planes!  I am noticing that while I see more planes at most airports, I am seeing fewer and fewer airlines.

A few years ago, a friend of mine Tony (see earlier post on how he got me into Flightmemory) and I tipped that the number of carriers globally would fall to a dozen or so with a small number of regional carriers. We saw national lines would get blurred, that fewer governments would be able or willing to prop carriers up and economics would force consolidation. Tony passed away a few years ago. He would be amazed at how quickly our predictions are indeed happening. Air France-KLM (2004), Lufthansa-Austrian-Swiss (2007-8), Delta-Northwest (2008), British-Iberia (2011), and United-Continental (2012). Now American and USAir are talking.

European airlines seem to be consolidating into seven major airline groups listed here in order of number of passengers carried:

1. Germany’s Lufthansa (who own Austrian, Germanwings, SWISS, Lauda, 45% of Brussels and 16% of Us Carrier JetBlue)- they made €820m in 2011 but lost money on British Midland who they are offloading. Their subsidiary Austrian is under major pressure
2. Ryanair- made  €401m and are aiming to double passenger numbers in a decade
3. Air France-KLM (who are closing in on ownership of Alitalia) lost €353 million
4. EasyJet - increased  pre tex profits in 2011 to €303 ($362m £248m)
5. International Airlines Group ( British Airways and  Iberia) who doubled operating profits to €485 million
6. Turkish Airlines (winner of best European airline in 2011) was profitable and aims to be one of the 12 airlines in the world
7. Air Berlin  ( now 29% owned by Etihad) and the newest One World member reported a net loss of €271.8m ($322m; £205m). I am curious as to how much Etihad will decide to end up owning

The remaning independent airlines in Europe seem to be increasingly limping toward bankruptcy or absorption: Poland’s LOT, Portugal’s TAP, Hungary’s Wizzair,  Ireland’s Aer Lingus, Slovenia’s Adria airlines, JAT Yugoslav and Czech Airlines all cannot last more than another couple of years.

Spain’s Vueling and Air Europa are now in a much stronger position with the collapse of Star Alliance member Spanair.  Eventually Vueling and Air Europa will have to join the consolidation dance.

Across in Scandinavia,  SAS Group has had four years of losses. Finnair is under enormous pressure after losing €87.5 million 2011 and is looking at outsourciing European flights to a new low cost joint venture.  Meanwhile low cost carrier Norwegian has ordered 222 new planes: 100 737 Neos, 22 737-800s and 100 new  A320neos.

I can’t see SAS, and Norwegian both surviving. One will have to give and the weaker one is SAS. Takeover by Lufthansa or Air France?

 I think Finnair will merge or be taken over. Possible candidates? IAG group? JAL? SAS?

Icelandair who has pegged its strategy on funnelling traffic through Iceland between the US and Europe must choose a new plane to replace its entire fleet of ageing 757s. They could remain a small regional player but more likely will be absorbed by someone else.

The British Airways/Iberia International Airlines Group is considering a possible stake in One World partner Japan Airlines when it has its IPO in September. It would seem to me that Qantas (which BA used to have a stake in) would also be a possible candidate for investment from IAG. Is it further possible that One World could move from airline alliance to airline? Eg One World Airlines combing all or most of their members?

How far will consolidation go? Will we end up with but three airline groupings in Europe all affiliated to an alliance ? And a couple of regional carriers?

Whatever it means, there will be fewer tails at airports to spot. Lets hope the mega-airlines keep the smaller brand names for a while on their planes.

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Malév Malaise- Hungary’s flag carrier demise

Spanair no more

The Vanishing Colours of Europe’s Tails

Image via Wikipedia

This week saw the first anniversary of a joint business agreement between American, Iberia and British. Under this agreement, the airlines agreed to co-operate commercially on flights between the United States, Mexico, Canada, the European Union, Switzerland and Norway. The agreement  was backed up by anti trust immunity from US and European authorities.

Shortly, after the agreement was signed, in January, 2011, Iberia and BA merged into a new company called IAG (international Airlines Group), Europe’s third largest airline group and the sixth largest in the world by revenue. The airlines have combined the strong BA Asian connections with Iberia’s Latin American connections. The new company has headquarters in Madrid, and operational offices in London. BA investors got 55 per cent of the carrier and Iberia 44 per cent. The two brands have been kept. There have been some claims by Spanish unions of favoritism to the Brits.

That merger and the agreement raises the question for me about American Airlines and IAG. Its so logical for IAG to merge with American.

American has not got many places left to go. United and Delta are not possible merger partners for lots of reasons (monopoly issues, already bedding down mergers, different alliances etc). Merging with USAir would be a bad idea.  Frontier, Alaska, Hawaiian and JetBlue are too small and Southwest would not give American enough international connections. American needs to go outside of the USA to get a merger partner.

American had been surrounded by rumours of its impending bankruptcy for a couple of weeks now.  If it did declare bankruptcy, it could clean up its balance sheet.  Such a bankruptcy would therefore,  make the merger even more interesting for IAG.

The major blockage to merger is that the U.S. government caps foreign ownership  of US carriers at 25 per cent. Moving this cap to 49 per cent, would make such an international merger much more possible and attractive. It would ensure the survival of American.

It could lead to some more interesting international mergers. My friend Tony and I predicted a world with 10 to 12 mega carriers and 25 -30 regionals. Be interesting to see how right we end up!

Wonder if anyone is lobbying the US Government over the 25 per cent rule?