The Case That Supports A United-American Airlines Merger

Statements from United Airlines CEO, Scott Kirby this week about a merger with American Airlines caused significant uproar but there is a case that supports the tie-up. 

Kirby’s Outlandish Proposal

United isn’t just posturing anymore. The idea of a merger or outright acquisition of American Airlines is being floated, and though American rejected the notion, it should make travelers very uncomfortable. United Airlines sees an opportunity in a weakened rival, and similarly, an opportunity with an administration that loves landmark deals, announcements, and surprising the public. But consolidation at this scale has never ended well for consumers. Fewer choices, higher fares, and a loyalty ecosystem that tilts even further against the customer is the likely outcome. Regulators will have to decide if this is efficiency or simply market power dressed up as strategy. Whether it was conjecture, a strategic move to get a smaller deal done, or just to annoy the company that fired him, this is the kind of move that would reshape the industry overnight.

A Case That Supports The Merger

There is a case that supports such a merger, as absurdly large as it may be, but not in a vacuum. Give me a wide berth on this.

US carriers have fewer seats from the greater New York market (including Newark) to London than British carriers and twice the competitors domestically. New York to Paris is drowning in Air France seats more than all US carriers combined by a hefty margin. Los Angeles to Tokyo is owned by the foreign carriers – even often forgotten about ZIPAIR has more seats (though the breakdown is quite different) than American or Delta.

New York Area (JFK/EWR) to Paris (CDG/ORY) Daily Capacity

Practical Implementation

United and American together would control far too much to approve, but if Delta paired up with Alaska too, and maybe JetBlue there would be two large US super carriers that still compete against each other. That combination would have similar domestic market share as the United-American merger. Southwest, Breeze, Allegiant, Frontier, and Spirit (if it makes it) could still apply pricing pressure at home. The combined carriers would have the ability to save money with combined stations and staff, better allocate seats, lounge space, invest more in their product, expansion and utilize their fleet better.

That combination also prevents the more significant risk that American never pays its mountain of debt, the same would be true of JetBlue which is having trouble at the moment. Alaska and Delta had a frenemy relationship for years that has vaulted into an all-out battle in Seattle, but faced with an existential crisis (especially if United-American was Star Alliance) they may bury the hatchet.

While this may seem outlandish, consider that two carriers, JetBlue, and Spirit have an unsustainable financial outlook. Frontier is not significantly better. In 2008, United and Continental merged, closing the deal two years later. Delta and Northwest followed in 2012, American merged with US Airways in 2013. In a span of three years, six US flag carriers became three. There’s precedence for this type of consolidation. It might not be good for US consumers, but in the case of JetBlue and Spirit, job losses and competition matter too. American’s finances are precarious and it may be a real risk that the carrier in its current form can weather many more years of negligible profit or significant loss.

Bad Idea, Don’t Do It

The combined entities may, in fact, be better equipped to fight foreign carriers invading US markets but that assumes that the US responds by offering more direct flights to foreign nations. It also presumes that foreign carriers don’t seek greater alignment with each other as Air France/KLM have done. IAG already owns Iberia, and Aer Lingus for example.

Either outcome would likely be atrocious for domestic flight costs. Southwest and the discounters don’t have the capital and the equipment to compete with either one or two behemoths. They wouldn’t be able to match the fleets, seats, or renewed cost savings and richer bank deals for combined entities of this size.

It would also shift the alliance strength that has been a stabilizing force across the industry over the last few years. If United-American were to transition to Star Alliance, oneworld would be left with just Alaska, entirely insufficient for the market size. And if it were to go to oneworld (unlikely because United’s balance sheet would likely leave its management in place), Star Alliance would lose a homefield advantage in the largest air market in the world. Just Air Canada would be the sole carrier north of Salvador in the Star Alliance. Both United and American were founding members of their respective alliances.

Conclusion

Some have speculated that Kirby’s remarks were motivated to get back at the airline that fired him, but if that was the case, it backfired as American stock rose, not fell on the news. Others have said (as I initially thought) that it was a case of “Shoot for the moon so you can hit the ceiling” approach to clear the way for a JetBlue acquisition. That still might be the case. But with time, I think he might have seen this as a genuine, once-in-a-lifetime opportunity to build a truly historic carrier. The Trump administration loves big deals, surprising the public, and unconventional approaches. It’s also unabashedly America first, and the objections from foreign carriers would likely encourage the administration not counter its ambitions. But whether just United-American or a Delta combination too, this would be disastrous for US consumers and potentially for the global aviation community.

What do you think? Could United-American happen if there’s a counter balance merger?

Get Daily Updates

Join our mailing list for a daily summary of posts! We never sell your info.

SUBSCRIBE!

You have Successfully Subscribed!