It seems only fitting that, on the same day AMR Corp. and US Airways Group unveiled their $11-billion (U.S.) merger, Warren Buffett outshone the two airlines with a $23-billion deal to acquire H.J. Heinz Co.
Mr. Buffett jokingly refers to himself as a recovering “airoholic” since he bet on US Airways in 1989. His misfortune with the then-branded USAir inspired one of his famous sayings. Had he been at Kitty Hawk in 1903, he should have shot down Orville Wright: “Karl Marx couldn’t have done as much damage to capitalists as Orville did.”
A man of simple tastes, Mr. Buffett would rather own the iconic bottle of ketchup that accompanies his beloved cheeseburger – even it if was quite pricey – than buy into the elusive promises of the airline industry’s sustained profitability.
But there are still a lot of “airoholics” out there, as the praise that followed Thursday’s merger announcement shows.
And chief among them are the American Airline creditors who believe they can recover more money by creating the world’s biggest airline.
Mergers are generally overrated, with unforeseen complications and results that often fall short of anticipated benefits.
The aviation industry is no exception: More often than not, airlines have flown straight into trouble.
The new American Airlines is hoping for $1-billion in annual synergies – 90 per cent of which would come from additional revenues.
But even after the former AMR comes out of bankruptcy protection, and the merger gets the nod from the U.S. Justice Department, the airline will have its work cut out for it.
The two companies employ close to 94,000 people.
Combining operations is where the fun begins.
While Doug Parker, the US Airways chief executive officer that will lead the merged company, has already reached out to American’s unions to ensure they are on board, combining seniority lists will create years of discontent.
Remember the protracted infighting between Air Canada and Canadian Airlines International employees?
This is especially true of pilots, as seniority dictates the planes they can fly and the altitude of their paycheques.
Mr. Parker has been there before: He steered the merger of US Airways and America West Airlines in 2005.
Problem is, things didn’t go that well. Seven years after the deal was announced, the pilots still don’t mingle.
And the combination of the two companies’ IT systems led to computer malfunctions so disruptive in 2007 that US Airways had the worst on-time performance of the big U.S. carriers for three months straight.
Consumer Reports magazine ranked it the worst American airline for customer satisfaction that year, and again in 2011.
Many of the big airlines that have merged are experiencing difficulties.
United CEO Jeff Smisek called 2012 the “toughest year of our merger integration” with Continental.
Since last summer, service has been so uneven that corporate fliers, the most lucrative clientele, are reportedly fleeing the airline.
If only it were worth the trouble. But there is no evidence that consolidation has helped airlines gain traction on ticket prices. Since 2004, fares have grown at an annual rate of 1.8 per cent. When inflation is taken into account, fares have actually gone down 1 per cent, according to a recent PricewaterhouseCoopers study.
When a major airline retreats from a route after a merger, competitors step in – be they a legacy carrier, a regional airline or a low-cost competitor.
In 2004, there was an average of 1.69 competitors on each of the top 1,000 routes. By 2011, after a wave of mergers, that figure hadn’t declined, this study notes.
Even if financing to lease planes is harder to find, there are few barriers to entry in domestic aviation.
New airlines might be short-lived, but their impact on competitor margins is noticeable.
Competition on lucrative international routes is also increasing, with ambitious North American expansion plans from such Gulf airlines as Qatar Airways, Etihad Airways and Emirates.
As fuel prices and labour costs have far outpaced the raise in fares, airlines have become addicted to baggage and change-of-ticket fees.
But while airlines don’t charge customers for using the washroom (just yet), there is a limit to the extras they can ask for.
A new generation of efficient planes promises to reduce fuel costs.
But even astutely hedged airlines will remain, by and large, vulnerable to unpredictable energy prices.
In the end, size doesn’t matter, only nimbleness does. However, even the best managed airlines have been hit by disruptive events such as terrorist attacks.
Some airlines are profitable, some years might even be memorable for the industry as a whole.
But they are few and far between in an airline industry whose financial results are so often in the red they look perpetually smeared in ketchup.Report Typo/Error