Last December marked the first anniversary of the merger of American Airlines and US Airways, which created holding company American Airlines Group, Inc. (NASDAQ: AAL), and made American Airlines the largest airline in the world.
When the merger was first announced in 2013, many in Charlotte saw it as a benefit to the area, but others had concerns about the future of Charlotte Douglas International Airport and its role in the post-merger American network.
Charlotte Douglas, which serves more than 39 million passengers annually, is widely considered a strategic asset in attracting and maintaining businesses for the area and figures prominently in local leaders’ vision for making Charlotte a future global hub of trade.
Prior to the merger, US Airways operated 90 percent of daily flights in and out of Charlotte Douglas, with Charlotte Douglas as its largest hub.
As the integration of the two airlines progresses, the US Airways brand is eventually absorbed and rolled into American, operating 90 percent of the airport’s daily flights, with Charlotte Douglas as its second largest hub behind Dallas/Fort Worth.
So a year into it, how is the merger going?
According to Chuck Allen, American’s managing director of government affairs, “It’s been a busy year. A lot has been accomplished, but this is a multi-year undertaking and we have a busy year coming up too.”
An early accomplishment of the past year was linking the two airlines’ route networks. In January 2014 the airlines began code sharing, placing their designator codes and selling tickets on each others’ flights.
“We’ve created the largest code share in the industry,” comments Allen. “This gives customers access to the combined network.”
The combining of the two airlines’ mostly complementary rather than competitive routes has created a substantial network. With the inclusion of the wholly-owned and third-party regional carriers operating as American Eagle and US Airways Express, the new network consists of nearly 6,700 flights per day to 339 destinations in 56 countries from its hubs in Charlotte, Chicago, Dallas/Fort Worth, Los Angeles, Miami, New York, Philadelphia, Phoenix and Washington, D.C.
And while the airlines’ frequent flyer programs have not yet combined, customers can currently earn and redeem miles on flights operated by either airline and have reciprocal access to clubs and upgrades.
Another past year milestone is the consolidation of duplicative operations. “We’ve combined operations in 82 different cities,” says Allen. “That allows us to be more efficient in the cities in which we’re co-located.”
When asked how that affects the airlines’ Charlotte labor force, Allen responds, “We’ve co-located ticket counters and absorbed those employees so there haven’t been any employment reductions.
“Right now, American employs over 10,000 in Charlotte. That will remain fairly consistent. Obviously, we look for additional flight opportunities out of Charlotte and that might drive future employee hirings.
“Companywide, we’ve been hiring people—more than 650 new pilots and over 2,000 flight attendants this year.”
Going for Great
In addition to new employees, American is also acquiring new aircraft. They took delivery of nearly 100 new aircraft in 2014, giving the airline an average aircraft age of 12.3 years and the distinction of having the youngest fleet of any U.S.-based network carrier. Orders of new aircraft continue with 112 expected in 2015 and 84 in 2016.
“We’re taking delivery of a new airplane and retiring an older one about every four days,” says Allen. “These new aircraft are passenger-friendly and more fuel efficient than the aircraft they’re replacing.”
The company reports orders of the Airbus A320 family, A350-900s, Boeing 737 MAX, 777-300ERs and will receive its first Boeing 787 Dreamliner this month.
In addition to new aircraft, American intends upgrades for much of its existing fleet. Refurbished interiors and new seats are planned for many aircraft including lie-flat seats in Business Class on both the 767-300s and 757s. The 93 A319s of the legacy US Airways’ fleet will also receive new seats and 24 main cabin seats offering extra space.
Improvements to in-flight entertainment and connectivity are also planned. By the end of 2016, all of the airline’s 777-200s will be retrofitted with in-seat entertainment systems and a walk-up bar.
Customers will also have an easier time powering devices in-flight. New 737s, nearly all new A321s as well as retrofitted A319s will have power ports in every row. And all new wide body deliveries, including 777-300ERs and 787s will have power ports at each seat.
Satellite-based internet access on all 787s, 777s, A330s and retrofitted 767-300s and 757s will allow connectivity on international flights.
The aircraft upgrades are just part of $2 billion in customer improvements American recently announced. The airlines’ nine hubs, including Charlotte, will also receive capital improvements.
Updated lobby designs and additional newer, faster and more reliable kiosks will streamline the check-in process. New worktables with 12 power outlets each and seating for eight will allow travelers to charge up devices near the gates in hub and gateway airports.
The company’s Admirals Clubs will also get a facelift with refurbished restrooms and shower facilities, improved technology, and expanded and healthier food options.
“Now that we have the network to complete globally, we’re going to deliver a product that’s better than our competitors,” explains American’s Chairman and CEO Doug Parker. “Refreshed cabins and clubs, modernized ticket counters, improved technology and new aircraft are further examples of how American is ‘going for great’—providing our outstanding team members the tools they need to deliver a great experience for our customers.”
The announcement of the $2 billion airline improvements comes in the wake of a banner financial year for American. Third quarter 2014 net profits, excluding net special charges, was a record $1.2 billion, an increase of 59 percent over 2013 third quarter results. Third quarter 2014 GAAP net profit was $942 million, the largest in any quarter in the history of the airline.
The company also declared its first dividend since 1980, returning $185 million to shareholders through payment of $72 million in quarterly dividends and the repurchase of $113 million of common stock.
“Our chairman has said the fourth quarter will also be a record fourth quarter so we’re going to have a record year of profitability for the company,” adds Allen.
While the challenges of the first year of the merger appear to be successfully met, the airline admits 2015 is a year of “heavy lifts.”
Behind the scenes, the company is working on getting a single operating certificate from the Federal Aviation Administration (FAA). “We have to combine the American and US Airways operations into one single book of operating procedures and the FAA must bless that,” explains Allen. “It’s extensive and very detailed but it should be completed by the summer of 2015.”
By the second quarter, American plans on merging the two carriers’ frequent flier programs. Mileage totals will combine for those having active balances in both AAdvantage and Dividend miles programs. And for the time being, American will continue to award points based on miles flown rather than on ticket cost, a change recently made to frequent flyer programs at Delta and United.
One of the “heavier lifts” of the upcoming year is the combination of the two carriers’ reservation systems. “This integration is behind the scenes but can be very visible to the public if we don’t do it right,” says Allen.
American has cause for concern. The integration of US Airways’ and America West’s reservation system a year and a half after their 2005 merger caused serious disruption at several airports. Combining the reservation systems of United and Continental was similarly problematic in 2012.
But the heaviest lift of all might be the Herculean effort of unifying 100,000 employees into a single workforce.
After a narrow loss last November and subsequent binding arbitration, American and the Association of Professional Flight Attendants reached an agreement worth $112 million in late December that would cover the 24,000 flight attendants of American and US Airways.
Efforts continue with pilots, passenger service agents, mechanics and ground workers. Not surprisingly, in a past year of record profits for American, profit-sharing has become a source of contention. While several other airlines have employee profit-sharing, American’s management prefers fixed pay increases. Negotiations continue.
“We are laser-focused on all the 2015 issues,” Allen states, “so if there are any surprises we can deal with them immediately. Obviously, our goal is to make sure there are no surprises.”
So a year in, what has the merger meant for service out of Charlotte?
“Charlotte has exceeded our expectations for a long time,” Allen states. “It’s a great operation and now it’s the second largest hub in the world’s largest airline. We continue to look at opportunities, but Charlotte will continue as a terrific East Coast domestic hub for us.
“We’ve got a lot of service out of Charlotte to the Caribbean year round. We’re now doing daily doubles to London and we’ll continue to fly to Frankfurt. We’ll also continue to do top destinations in Europe in the summertime.
“Since the merger, we’ve added a number of new destinations in the Midwest like Tulsa and Oklahoma City.”
When asked about the Charlotte Regional Intermodal Facility, which is located at the airport and enhances global trade for the area by facilitating cargo transfers among airlines, trucks and railroads, Allen responds positively. “It’s a great addition to Charlotte,” says Allen. “It provides opportunities that most airports in the country don’t have. We’re very pleased it’s here.
“The new, larger network provides more opportunity on the cargo side in Charlotte, but cargo operations in this country are predominantly on wide body aircraft. As primarily a domestic hub, we fly very few wide bodies into Charlotte currently. Of course, the more wide bodies we have in the future, the greater our opportunities are.”
While opportunities certainly exist, several current issues have the potential to impact the future of American at Charlotte Douglas.
The airline’s 30-year master lease with the airport, negotiated under legacy US Airways, expires in 2016. “I think we’re going to be partners for a long time,” Allen says on the topic. “We have a substantial investment here. The Charlotte operation is one of the best in the country. The airport is the most efficient in the world.”
In fact, Charlotte Douglas’ historically low operating cost is a major part of its attraction for American or any airline and one of the reasons why there is so much at stake in the ongoing battle over who controls the airport.
A judge’s ruling last October allows the city to maintain control of the airport and blocks an independent commission favored by state legislators from taking over. So far, the FAA has declined to weigh in on the decision.
Expressing confidence in the current management at Charlotte Douglas, American Airlines remains neutral about who should control Charlotte Douglas. “Our position hasn’t changed,” says Allen. “We remain agnostic as to who runs the airport.
“We just want to make sure that it’s run in the most efficient and cost-effective manner like it has for years. Management that keeps the airport as a low cost, efficient operation is what we want to see in Charlotte.”
That low cost could soon be threatened, in part, not by airport management but by the North Carolina General Assembly.
In 2006, North Carolina lawmakers approved a cap that refunded airlines any fuel taxes paid in the state in excess of $2.5 million. The cap, with an estimated value of $10 million of revenue to the state, is set to expire January 1, 2016. American is the largest beneficiary of the cap.
“Taxes are an important factor in the cost of an operation,” says Allen. “Certainly, you want to put your assets where they have the greatest return for you. Virginia has a very low tax rate on fuel, as does South Carolina, and Texas has no tax on fuel.
“The tax cap is certainly beneficial to American and if it were to sunset, as it’s scheduled to do at the end of the year, without being continued or mitigated in some form, then that will change the cost dynamics in North Carolina and Charlotte. The fuel tax is the number one legislative issue we’ll be focused on in North Carolina for 2015.”
According to a recent Tax Foundation blog, Illinois has the highest total tax rates for commercial jet fuel, followed by California and Connecticut. North Carolina is 20th on the list. Neighbors Virginia and South Carolina ranked 38th and 42nd, respectively.
Texas, where American is headquartered and where it has its largest hub, doesn’t tax jet fuel. Neither do Delaware and Ohio.
Airlines serving North Carolina are lobbying state lawmakers to extend the cap or even exempt the jet fuel sales tax completely. They estimate that if neither step is taken, North Carolina will be the fifth costliest state for the purchase of jet fuel.
Despite upcoming challenges, Allen says American “will remain fully engaged in the Charlotte business community at multiple levels and in multiple organizations.”
We’re very interested in the growth of Charlotte,” Allen continues. “That’s why we are members of the Charlotte Chamber of Commerce and Charlotte Regional Partnership. We think the Charlotte area has a lot of opportunity and we’re committed to making Charlotte grow.”