Check this out:
Monday Morning, January 15, 2001
American Out-Slicks United. Big Time.
Now, let's be clear. You heard it here first. American Airlines just
implemented the most brilliant piece of tactical airline strategy since
the onset of deregulation.
United, busy with its merger with US Airways, just got nuked.
And they don't even realize it yet. Neither does Wall Street, which was
just too eager to downgrade American's stock. Big mistake. Big
opportunity for investors who have a planning horizon longer than a
re-run of Roseanne.
Again, you heard it here first: Within three years, American Airlines -
not United - will be the dominant revenue airline at every major East
Coast city. Boston. New York. Philadelphia. Washington. And United will
be stuck trying to make duplicative hubs work while AA becomes the main
carrier of choice at all - yes - all those big O&D cities.
In one stroke (actually set of strokes) Don Carty has not only guaranteed
enormous high-yield traffic growth for AA, but he also left his major
competitor in what may be an eventually dangerous strategic position. You
heard it here first.
Bear with us. This will take a bit of time, but it will illuminate what
most of Wall Street and the aviation media have completely missed. Stuff
they'll all be spouting only after it appears in their rearview mirrors.
United: Getting Led Down the Path. The past week, there were several
important decisions that, according to the mainline and aviation media,
were great victories for United Airlines in its quest to get its paws on
The European Union "approved" the US/UA deal, with just a couple of
"little" changes. (Little changes, as we'll see, that are not so little
in American's grand scheme.)
American Airlines agreed to buy a whole bunch of US Airways assets from
United, thereby reducing fears among regulators about United's potential
"dominance" - there will be competition aplenty, the media implied.
United and US Airways management just whooped it up. The deal is now
assured. And the aviation trendies cheered, too.
Wrong. When all these events are taken from a long term tactical view,
United just torpedoed the long-term benefits of its own merger, and may
have outsmarted itself into a colossal black hole. Let us count the ways.
Meanwhile, In St.Louis. First, separate from the US/UA deal, American
just picked up the assets - cheap - of TWA. What that means is that AA
will get a highly efficient mid-continent connecting hub, along with a
dominant position at a major O&D market at St.Louis. What that means to
United is that its major competitor will have far more capacity - and far
more efficient capacity - to increase East-West traffic, and to gain more
share in long-haul, higher yield markets.
See, United and AA both are stuck with congested and expensive O'Hare for
East-West traffic flows. But United only has Denver as an alternative
reliever to expand these flows. Plenty of room at DEN, but it's obscenely
expensive. Worse, when the snow flies (which tends to happen in Colorado)
DIA becomes a major bottleneck due to an incredibly inefficient remote
de-icing system. Major delays. Major expense.
Compare and contrast this with AA, which will now have both DFW and STL
(along with all the airplanes, crews, and facilities already in place) to
flow passengers across the nation. A lot more efficient capacity than
United, by the way. And, unlike United, AA will need to do a lot less
rationalizing of route systems.
(NOTE: In response to those who've nearly choked when they hear the words
"efficient" and "St.Louis" in the same sentence, let's understand that
this is in the context of the AA system, and how AA can be expected to
utilize these facilities. AA will likely not need to cram as many banks
through STL or as many flights. Therefore, less congestion. Unlike the
TWA operation, AA will engineer it to be compatible with their DFW and
ORD operations, not competitive with them. Also, bet your frequent flyer
miles that AA will move after the deal is done to eliminate some or most
of the small-airport feed operations, particularly with 19-seater
aircraft, again freeing up airside "capacity." Another efficiency gain is
the alternative capacity AA will have when one of its E-W hubs is down
due to weather or the idiot ATC system. Traditional consultants and the
aviation trendies think the STL "hub" is some sort of natural phenomena.
They are, as usual, wrong. It is merely a set of facilities that an
airline uses as it sees fit. AA will use it differently than TWA, and the
results will be different, too.)
So, while United is busy monkeying around trying to merge into a high
cost East Coast conglomerate, American just laid the groundwork to blow
United away in the rest of the nation. And even if the UA/US merger is
deep-sixed, AA will still be miles ahead of United.
(In tennis parlance, that's called "Game" - for American)
Doing The Deal At Any Cost. But it gets worse for our friends at United.
AA also has just cut another deal that will blow United away in the key
markets they are trying to buy into with this US Airways merger.
Deliciously for Mr. Carty, United is willingly assisting AA in the
See, the stuff that United is so eagerly selling to AA are hard assets,
like gates and slots that are a) largely insulated from the effects of
competition, and b) will give AA the ability to essentially torpedo
United's intent to be the dominant carrier on the East Coast.
American gets 36 slots at LGA. (Can you say "ka-ching?") It get five
gates there, too.
American gets half of the US Airways Shuttle market, which means United
has given away a chunk of what would have been a large part of its new
identity in the region.
United doesn't know it, but this transaction is neck and neck with the
one the Indians cut for Manhattan. AA gets a dominant role at BOS, LGA,
and DCA. Not low-yield markets, these. And for the most part, there's no
pesky Southwest airplanes anywhere in sight.
American also gets 49% of DC Air. Yes, as Air Transport World put it, DC
Air is a transparently cynical deal. But AA has the right to buy the rest
of the airline. Remember, Robert Johnson did not become a gazillionaire
by doing dumb deals. Chances are he'll eventually sell DC Air for a good
dollar. And that means AA will be the dominant carrier in Washington,
with a very large presence at LGA and Boston, too. Guess what that could
mean to United's half of the east coast shuttle.
(In tennis parlance, that's called "set" for American.)
On The Whole, AA'd Rather Be In Philadelphia. Also critical in
understanding this chess game is Philadelphia. As part of the deal, AA
agreed to operate at least two daily flights between PHL and Denver, San
Jose, and LAX. Markets that on the surface don't seem to have that great
a fit with AA's core route system. But, as we'll see below, there is
method - brilliant method - to Mr. Carty's madness.
Enter here the annoying interlopers at the European Union, who grandly
approved the United takeover of US Airways. (Like, big deal. It isn't
these guys in Brussels that are losing a major competitor.) But they
demanded a couple of concessions, which apparently United was only too
eager to give. Like getting a new competitor in trans-Atlantic markets
from PHL, PIT, and CLT. The last two will be problematic, as any such
airline will likely need a connecting hub at either end to make it work.
But Philadelphia. Now there's the story. Its a big market. And again,
it's American that has probably again out-slicked our friends at United.
Remember, AA has already agreed to operate several markets from PHL.
Guess who might be in line to take those EU-ordered international markets
from PHL? You guessed it - probably American. Result: AA will have a
major operation at PHL, one that directly competes with United's IAD
(In tennis parlance, that's called "Game, Set, and Match") AA takes the
Nationally, they will end up with a far larger and more efficient hub
network. When the dust settles, AA will be bigger than United.
In the East, AA will dominate BOS, LGA, PHL, and DCA. Big revenues.
United will be stuck trying to integrate high-cost US Airways into its
system while American will be making hay where the revenue is.
Tale of Two Mergers. This doesn't make the UA/US merger any better. It's
still anti-consumer and anti-competitive. It still should be stopped and
opposed by any airport that cares about its future. But the AA piece of
it will at least provide some offset for the consumer. The sweet justice
is that in trying to make the merger work, United has just given away the
The AA/TWA deal, by the way, is very different from the UA/US merger.
American is simply buying assets from a carrier that really is going out
of business anyway. United is gobbling up a perfectly viable competitor.
The first deal is unfortunate, but unavoidable. The United/US Air deal is
a conscious attempt to reduce competition.