Management

The American-US Airways Merger Is a Bad Idea


American Airlines unveils a new company logo and exterior paint scheme on a Boeing 737-800 aircraft on January 17 in Dallas.

Photograph by Tom Pennington/Getty Images

American Airlines unveils a new company logo and exterior paint scheme on a Boeing 737-800 aircraft on January 17 in Dallas.

Endlessly repeating falsehoods won’t make them true—something that stock analysts and the press need to learn about mergers in general and airline mergers specifically. So no, the much anticipated American-US Airways merger is unlikely to be a success by any measure. That’s because, in the airline industry, as in many industries, size really does not matter for success, except possibly negatively.

Pick your preferred performance measure, and see if it shows any relationship with size.  The well-known ranking of U.S. airline performance by Brent Bowen of Purdue and Dean Headly of Wichita State listed these airlines as best in 2012: AirTran (AAI), Hawaiian (HA), Jet Blue (JBLU), Frontier (FRNT), Alaska (ALK), Delta (DAL), Southwest (LUV), U. S. Airways (LCC), Skywest (SKYW), and American (AMR)United (UAL), following its well-chronicled integration problems with Continental, ranked 12th. In general, the bigger the airline, the lower the ranking. 

How about internationally? Measured by total passengers carried, the top 10 list from the International Air Transport Association (IATA) contains not one of the top 10 of the World’s Best Airlines from 2012 as reported on the CNBC website, a list that includes, in order, Qatar Airways, Asiana (020560), Singapore (SIA:SP), Cathay Pacific (293:Hong Kong), All Nippon (9202:Tokyo), Etihad, Turkish, Emirates, Thai, and Malaysian.

But who cares about passengers—certainly not most U.S. carriers. What about profits?  From the second quarter of 2011 through the second quarter of 2012 (the most recent period available from the U.S. Department of Transportation), three of the four highest average operating margins were earned by Alaska, Skywest, and JetBlue, which ranked 7th, 8th, and 9th in size. Same story with unit costs—ExpressJet (XJT), JetBlue, and Airtran had the lowest.

The simple fact is, as Gary Hamel commented years ago, zero plus zero still equals zero.  Or in the airline business, if you take one troubled airline and combine it with another, all you get is a larger catastrophe.

The problem is not size—economies of scale are not that important in many industries, not just airlines, and are achieved in any case at sizes much smaller than the larger companies. The problem for the airlines is a flying experience that causes people to want to drive for short trips and to avoid long trips if they can. It is not by accident that some of the most consistently profitable airlines, such as Singapore internationally and Southwest domestically, consistently rank high in customer satisfaction. As research by Claes Fornell, founder of the American Customer Satisfaction Index, demonstrates, customer satisfaction drives profits—and shareholder return.

Maybe the preoccupation with size is because so many of the stock analysts and airline industry pundits are male. But in airlines, as in most industries, size does not matter.  Mergers just increase market concentration, raise prices, and make customers worse off.

Jeffrey_pfeffer
Pfeffer is the Thomas D. Dee II Professor of Organizational Behavior at Stanford University's Graduate School of Business, where he has taught since 1979. He is the author or co-author of 13 books, including Power: Why Some People Have It—and Others Don't. His latest book, Leadership B.S: Fixing Workplaces and Careers One Truth at a Time will be published in September, 2015 by HarperCollins.

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