How to Merge Two Airlines

Corrected on 2/14/08: An earlier version of this story incorrectly reported US Airways projections for rising oil prices and the net effect of rising oil prices on their balance sheet.

USAirways Chairman and CEO Doug Parker.

In 2005, Doug Parker, CEO of America West Airlines, initiated a novel merger with USAirways, which was in bankruptcy and close to liquidation. By most accounts, the deal salvaged an operation that otherwise would have disappeared, and in 2007 the combined airline, which took the USAirways name, earned a $427 million profit. In late 2006, Parker made a similar bid for Delta Air Lines, also in bankruptcy, which Delta rebuffed. With widespread speculation about an imminent merger between Delta and Northwest, and possibly United and Continental, U.S. News asked Parker about his views on consolidation and the lessons he's learned from the merger he's overseen.

There's been talk about the need for consolidation in the airline industry for years, maybe decades. Has the time finally come?
I think there are three things that make this the time. It probably sounds self-serving, but one is the financial success of the USAirways-America West merger that we did. A lot of people were skeptical of that at the time, but we've shown that putting two airlines together can work. Part 2 was our attempt to acquire Delta out of bankruptcy [in 2006]. What that showed is there's a lot of interest in mergers in the industry. It forced them to say, "We can do better as a stand-alone." Well, now their stand-alone numbers don't look as good as what we offered. When you turn down an offer and tell your owners you can do better on your own, you need to do that. The third thing is oil prices. Our 2008 projections show that oil prices will be 25 percent higher than in 2007. For us, that represents $800 million worth of expenses.

Why does the airline industry need this?
The industry is extremely competitive, but there's been so much fragmentation that it can't be profitable. There's been room for too many hub-and-spoke carriers, which has meant too many redundant hubs. People talk about monopolies but I think consolidation will be good for consumers, because we'll have more healthy carriers.

You don't think it will inhibit competition?
We have six carriers now, and no single one of them can meet the needs of all consumers. Mergers allow you to be more efficient. Value isn't created by raising fares; it's created by lowering costs.

So you've actually done an airline merger. What did you learn from combining USAirways and America West?
One of the first lessons is, we're extremely happy we did the transaction. It has worked. Financially we're much stronger now than either company was before.

Putting two airlines together is difficult work. It will take a couple of years, and there will probably be some level of disruption to your customers. You have to let them know there will be some disruption. But it's worth it.

Even in the best-managed mergers, there will likely be some integration issues that affect your employees and customers for the first two years. Actually, the first six to nine months is pain free—most of the work is planning for the actual integration, which makes the imminent pain that much worse, since your customers, employees, and managers start to think that it's all going to be painless. Know that it's coming and prepare your teams for it, but also know that it will end and the best thing you can do is get through it as quickly as possible.

The Airways merger hasn't been seamless. There have been problems with on-time performance, lost luggage, and other things that affect consumers. What have been your biggest challenges?
The biggest thing has been merging two reservation systems. We cut over in March 2007. By far that was the biggest integration problem we've had. We spent a lot of time working on that before we cut it over, but still, by that point, we were 1½ years into the merger, and people who made a reservation on one system would get to the airport and the agent couldn't access the reservation on the other system. So there was pressure to get that done.

So it was the reservation systems that were responsible for the late flights, lost bags, and so on?
For the most part. We took two reservation systems and put them together into one that, at the time, wasn't as good as either of the two. If we had it to do over again, we probably would have said, bear with us a little longer. But we've overcome all that, and in December we were No. 1 in on-time performance.

The merger happened in 2005, and nearly three years later, you're still not done, right?
Everything is done except for some of the labor contracts. We got a single operating certificate from the FAA in 2007; that was a tremendous amount of work. In September 2007 the last of the major systems cut over.

Given the original merger, then your bid for Delta, you're obviously an advocate of consolidation. So if there is a fresh wave of mergers, where will USAirways fit in?
You can't just be sitting on the sidelines. I have indeed been a proponent of consolidation, and it looks like some things are going to happen. But I'm not sure that if there's one merger, that all these other dominoes are going to fall, like you're reading in the paper.

We're a hub-and-spoke airline, with hubs in Charlotte, Philadelphia, and Phoenix. We want to expand that network. But if there is consolidation, we don't necessarily have to do anything. If we choose not to participate, that might be the right choice. We're one of the Big 6 now, and if we end up as one of the Big 4, then consolidation itself will help us.

I realize you can't say, "We'd like to merge with this or that airline," but there must be priorities you look at as you think about how to grow USAirways. What kinds of things do you look at? More service out west? More international routes?
Uh, yes. Probably of most value to us would be more international service. USAirways and America West are mostly domestic carriers.

If a couple of big carriers merge, will that create more opportunity for discounters like Southwest or others to come in and undercut them on fares? Will USAirways be in a position to do that?
There might be some of that, but I think the distinction between network carriers and low-cost carriers will go away over time. All of us need to get costs down. But there certainly will be intense competition. What you won't see is, I don't think the system needs more hubs.

Conventional wisdom seems to be there will be these two big mergers, Delta-Northwest, and maybe United-Continental, and then the dust will settle. Do you foresee any surprises?
It's fair to say there will be surprises. Whatever seems like the most likely scenario is probably not where we'll end up. It's much more likely that something else will happen.

Are airline executives calling you and asking, "Doug, how do you merge two airlines"?
That, I can't say.