Sunday, December 07, 2014

Challenges Await Year Two of American Airlines-US Airways Merger: CEO Doug Parker Talks About Preparations for Hardest Part of Integrating Two Big Airlines

The Wall Street Journal
By Jack Nicas

Dec. 6, 2014 1:00 p.m. ET

After cruising through the first year of the new American Airlines Group Inc. since its merger with US Airways, Chief Executive Doug Parker is preparing for the hardest part of integrating two big airlines: year two.

One of American’s biggest jobs for 2015 is joining employees of the two carriers under single contracts, and that is already proving difficult, with strains emerging recently between the company and its pilots and flight attendants.

The other is shifting US Airways data and systems over to American’s computers, a task that historically has led to system meltdowns that disrupted operations in other airline mergers.

“So far, so good, but this is at least a two-year process and the big things happen in the second year,” Mr. Parker said in an interview. “It’s early and we have a lot of work to do.”

On Monday, American intends to unveil plans for a series of investments in its planes and facilities, including new seats on older jets, Internet connections on more international flights, as well as upgraded passenger lounges and kiosks.

The improvements are part of a $2 billion spending plan from now through 2017 to refresh the airline’s aging fleet and keep up with the competition, which is also spending big on new seats and technology.

American is set to receive more than 500 new aircraft through 2022, replacing many existing planes. The upgrades focus on older aircraft that are sticking around, such as 35 Boeing Co. 757s that are getting lie-flat business-class seats and 93 Airbus Group NV A319s that are getting all new seats and power outlets for fliers.

The upgrades also include in-flight Internet on the company’s 757s and 767-300s, plus 400 new kiosks in gate areas for customers to secure last-minute upgrades and reprint boarding passes.

Mr. Parker, the former CEO of US Airways, started pushing for a merger shortly after American filed for bankruptcy protection in late 2011. American’s then-CEO, Tom Horton, resisted a merger, so Mr. Parker went to American’s employees and secured their support.

Now dealing with those employees is proving to be one of the most difficult steps in integrating the airlines. Last month, 24,000 flight attendants from the two carriers narrowly rejected a joint labor contract. Under rules in their merger contract, federal mediators will now help decide the attendants’ new agreement by February, which is likely to be less lucrative than the offer they rejected.

Meanwhile, American last month agreed to negotiate past a deadline it set for contract talks with pilots. Management can send negotiations to binding arbitration, but that process is likely to take months and could delay the integration if it doesn’t begin soon.

American’s labor negotiations are unusual because the company already agreed to interim accords with many employees before the merger, including special rules on how to reach true joint contracts.

“We’re trying really hard not to draw lines in the sand, but we all know we can’t let [negotiations] delay integration,” Mr. Parker said. “There’s no need for this to go on much longer.”

Mr. Parker has stressed that labor harmony is crucial to a successful integration. United Continental Holdings Inc. has still yet to reach joint contracts with all of its employees since the 2010 merger between United and Continental Airlines.

In the first half of 2015, American expects to receive recognition as one airline from federal regulators and merge its frequent-flier loyalty programs.

In the second half, American will shift US Airways’ reservations system, which stores and handles all its data on operations, employees and customers, over to American’s system. The transition is an enormous undertaking that airlines in past mergers have done all at once, often creating disruptions when things go wrong. Mr. Parker said American would instead meld the systems gradually to mitigate risk.

When American and US Airways merged a year ago, many observers wondered whether eight hub airports—five from American and three from US Airways—were too many for one network. Mr. Parker rejected the argument and has stuck to that stance after seeing the hubs work together for months. “Each of the hubs are doing better now than before,” he said, adding that he expects none of the cities to lose their hub status.

Mr. Parker said the most surprising thing of the past year was how many things needed improving at American once he arrived from US Airways. He said the carrier was inefficient and accepting of common issues, such as broken seats and frequent delays.

“As we looked under the hood, there was more opportunity than we thought there was going to be,” he said. “That’s all good. Those are all things we know how to fix.”

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