Executive Summary

In light of the merger between US Airways and American Airlines, the following report was
produced to provide a review and analysis of the current airline industry (specifically in North
America).

The industry as a whole is analyzed using the Porters Five Forces model: The threat of new
entrants is seen to be very low, as it is extremely hard for a firm to gather enough capital to
enter an industry as large as this. The threat of substitute services and goods is considered
prominent yet not critical, as there are many transit scenarios where an airplane is simply
impractical. But planes remain an irreplaceable form of international transportation. The
bargaining power of customers is considered limited as airline companies often differentiate
themselves with amenities, thus catering their services towards a specific group of consumers.
From the consumers point of view, this can be seen as less choice (because they usually have
a preconceived preference). The bargaining power of suppliers is seen as a high threat because
of the limited number of competitors. Competition amongst existing members is also a high
threat in that it is ever lasting.

In conclusion, the airline industry for the past few decades was characterized by intense
competition among existing firm and the stability of market make up. However, the recent
mergers among many major airlines is signifying a more turbulent market. The impacts of one
such merger are examined in more detail.

The merger between US Airways and American Airlines impacted many stake holders. The
customers of the airlines now have access to more routes and destinations, though some losses
(such as rewards) were suffered. Overall, the merger resulted in more than one billion dollars in
savings per year, which will carry over to consumers. The impact on employees mainly stem
from incompatibility between company policies. Some employees end up receiving a raise while
others have their salaries lowered. Some employees are granted seniority while others are not.
Also some people are forced to go through trainings in order to adapt to changes in operation.
With regards to investors, the only impact that is for sure negative is the 1.2 billion transition
cost. Other effects such as the unbalanced distribution of stocks will have varying impacts from
investor to investor, depending the amount of shares they own in each company.

Based on current trends in the industry, a plausible merger between JetBlue and Frontier
Airlines was discussed. JetBlue is a major airline with 199 planes, looking for opportunity to
expand; Frontier on the other hand has only 55 planes, and has filed bankruptcy. A scenario

such as this one often resulted in mergers, as history has proven. The two firms share various
commonalities, such as their fleet, non-unionized nature, their similar track record, etc. These
features would make the transition process relatively easy.

In summary, the once stagnant airline industry is seeing more and more changes as a result of
external and internal forces. It is in ones interest to recognize and understand these changes
because their impact, as this report has shown, can be quite dramatic.

1. Analysis for the Current Airline Industry

Threat of New Entrants:
-For the airline industry, the threat of new entrants is a low one primarily due to the extremely
high capital that is required up front to start a new business. Considering the time value of
money, this investment become even more demanding. Without a pre-existing customer base, it
is very hard to establish and or sustain a new business in this industry. One could consider a
loan, but considering the high principle required and the exponential effect of compounding, it is
usually very risky to do so. Right now, considering the low interest rate (see Appendix II), is
possible the most optimal time for a new firm to enter, if they wish to do so. When it comes to
something that is complex and high risk such as operating an airplane, most customers usually
place their faith in well known, major companies. It is very hard for a new entrant to earn the
trust of people who may have already grown loyal to an existing firm.
-One factor that makes this threat stronger is that the business not very proprietary. There are
no patents or intellectual properties that can grant existing companies a competitive edge.
However this threat is limited by the fact that its usually not possible to take advantage of price
mismatch among markets (arbitrage) as airlines usually employ planes made within the country.
This means new entrants have to pay the same among as existing firms to access the
technologies, which as mention before, can be quite hard.
Threat of Substitute products or services:
-Within the country, there multiple other ways of travelling such as trains or coach buses. They
are considerably slower than airplanes, though they are significantly cheaper. In some cases,
other means of transportation such as bus or car might be preferred for purposes such as
sightseeing. The current trend of sustainable transportation might also present a minor threat to
the industry as there are no eco-friendly ways of air travel at this moment.
-Often times, short trips within a city or even province (state) usually no not require airplanes.
On the other hand, the only practical method of inter-continental travel is via air.
Bargaining power of customers:

-Most of the airlines feature some sort of niche aspect which differentiate themselves from other
companies (such as cheap price). This means consumers dont get as much choices. Their
decision will be highly dependent on their social-economical class, if anything.
-Customers also lose bargaining power in that the flights available to them are constrained by
the schedules of the airlines. Often only a few companies will have a flight that is perfectly
compatible with a customers schedule.
Bargaining power of suppliers:
-Currently, Boeing and Airbus monopolize the airplane manufacturing market in the U.S. In
Canada, the major manufacturer would be Bombardier. The limited competition among
suppliers grants them more bargaining power. In addition, it is usually very hard for a company
to switch supplier as there are usually long term contracts between an airline and its supplier in
order to reduce risks and uncertainties. On the other hand, airlines are one the most significant
sources of income for the suppliers, which reduce their bargaining power.
Intensity of Competitive rivalry:
-From a consumers perspective, the material offerings of the suppliers are usually very
standardized. What companies might do to differentiate themselves is through various amenities
and services. However different customers might have different expectations when it comes to
these, so the opportunity for airlines to compete via services is limited.
-The competition among existing firms is intense in that it is very long term. Most of the firms
sign on long term contracts with suppliers in order to reduce cost (of switching). This means it is
highly unlikely for one of major the players to exit. In other words, whatever prominent rivalry an
airline faces at this very moment, is likely to remain that way for a very long time.
2.1 Impact on Consumers
The merging of US Airways and American Airlines will result in multiple changes, both beneficial
and detrimental, towards the consumers of the flight service. One prominent disadvantage
towards consumers is that fliers of US Airways will no longer be allowed to use their frequency
flier points on star alliance flights, whereas before they were. Moreover, this merger will
disservice the customers through increased flight prices since the current merged airline has the
power to set price that people are willing to pay as a result of less competition.
Even though the airlines say they will not cut any hubs, past mergers have resulted in hubs
being cut. To confound this confusion, US-Airways and American Airlines have hubs in locations
that are very similar. As such, it would seem that hubs will be cut, but these cuts will not really
affect customers. On the other hand, the conditions under which the merger will be allowed
stipulate that the combined airline must sell 134 spots at Reagan National Airport and 34 spots
at LaGuardia Airport, thus implying that service will be affected to the detriment of both the
company and their customers. The net impact is somewhat ambiguous.
By necessity of consumer experience and public relations, there are some advantages to the
consumers of the merger. These include the use of US-Airways craft on American Airlines

destinations, which would significantly improve the flying experience, it would enable access to
more lounges at airports for customers of the airlines, and the benefit that elite fliers on one
airline are also recognized on the other. Furthermore, it is expected that the combined company
will maintain all current hubs (Charlotte, Chicago, Dallas-Fort Worth, Los Angeles, Miami, New
York, Philadelphia, Phoenix and Washington DC) supported by US Airways and American
Airlines, plus more as the two companies come closer with the added $1 billion+ in savings
(which would allow for significant expansion). Whats more, the addition of flight destinations,
including those in South America and Asia, is something that flyers should look forward to.
A potential political impact emerges when one consider the government as a stake holder. One
prominent theme shared by many political campaign is publish transportation. Politicians often
fight for more accessible transportation for the public in order to earn their favor. The merger will
drastically change alter the availability of air travel, and force some politicians to change tactics.
2.2 Impact on Employees
One example of an effect that each stakeholders would view differently is the unionization of
customer service representatives. According to the New York Times, the customer service
representatives of US Airways were unionized before the merger, while before the merger, the
most recent bid for unionization of American Airlines customer service personnel lost. Since the
merger, the customer service representatives of the combined airline have now been unionized,
a change with too many consequences to analyze here. For those who voted against
unionization in the previous bid, this would appear to be a detrimental effect of the merger, while
for the smaller percentage which voted for unionization, this would be considered a benefit.
An example of a change that lead to a seemingly unfair result towards the American Airlines
employees is the pay cut they will receive, while in contrast, US Airways employees will receive
a pay raise as a result of the merger. Thus, once more, it appears that for an outside observer,
based on this metric the merger neither effects good change, nor bad change, only 'change'.
A final type of an effect on the employees is any change which will cause friction among those
stakeholders involved in the adjustment. For example, the company will have to deal with issues
of seniority, and integration of the two corporate structures since there is a law in effect limiting
seniority in American Airlines, while there are no such structures imposed upon US Airways. To
confound this integration problem, some of the current unions have ongoing contracts that
cannot be maintained if a merger were to occur. In addition, the two airlines have different
policies regarding payrolls which would need to be sorted out. Finally, the flight attendant staff
from one airline may have difficulty operating an aircraft of the other airline as they would have
been trained to use different models, and in effect, different procedures.
As can be seen, while for certain changes there are some beneficiaries among the employees,
and there are certain changes which can be viewed by the employees of either company as
either beneficial or detrimental, overall, the changes due to the merging operation can be
viewed as undesirable to the employees.
2.3 Impact on Investors

As the driving force behind the merger, it is to be expected that the investors would receive the
most benefits from the merger. The most immediate benefit of the merger is that it prevents
American Airlines from reaching bankruptcy. On a longer timescale, the main benefit is that
there would be savings of $1 billion/year, and an increase in share-price, an effect which can
already be seen. The other effects of the merger are more of a balance between benefiting US
Airways and disadvantaging American Airways investors.
One example of a change which benefits the American Airlines but disadvantages US Airways
is the relative value of their stocks, and thus the control each companys investors will have in
the new merger, US Airways Group Inc.. American Airlines bought 70% of US Airways stocks,
while US Airways only bought 3% of American Airlines, and thus their relative values in the new
airline will be scaled to the inequality of how many shares each company owns.
The only real disadvantage to investors of this merger is that there is a $1.2 billion initial
transaction cost. Considering the time value of money, this amount becomes even more
significant. However, based off of the predicted annual savings due to synergies, this
transaction cost is relatively minimal.
3.1 Potential Mergers
In the North American airline industry, many may claim that much of the air travel industry is
saturated. Slots in and out of major airports are full and unless there is a substantial upgrade to
the air traffic control infrastructure in the U.S. (the U.S. is currently using almost World War II
technology for Air Traffic Control), there is almost no space for airline growth. As the Big Three
(United Airlines, Delta Airlines and American Airlines) hold an oligopoly over air travel in the
United States, there is not much room for a merger of large carriers. Most of the big airlines are
still having struggles with their mergers -- American Airlines as described above, and United
Airlines employees are still unhappy about the merger and the company is still operating as two
separate companies having separate labor unions and separate staff bases.
Currently, the largest carrier that has not experienced a merger is JetBlue Airlines (The top 4
airlines have all experienced mergers or acquisitions. See Appendix II). They have the
resources to grow and it is in their best interest to do so. In the pursuit of an airline merger for
JetBlue, a possible candidate would be Frontier Airlines. Frontier Airlines is an airline with a fleet
size of 55 airplanes and is in need of support as it has been under Chapter 11 bankruptcy since
2008. With JetBlue airlines having 199 planes and performing well economically, an acquisition
of Frontier Airlines would be a great method of expanding JetBlues fleet and destinations.
In terms of fleet, a merger between JetBlue and Frontier would be optimal as both airlines utilize
the Airbus narrow body family as the backbone to their fleet. A merger with similar fleet would
allow integration between both airlines in terms of pilot training and pilots from both airlines
could change between equipment. In terms of flight attendants and passengers, the inflight
product and experience would be very similar due to similar fleet and both airlines being nonmajor airlines in the United States. In terms of frequent flyers, since both airlines operate similar
to LCCs (low cost carriers), there is no issue of losing frequent fliers as both airlines are not
part of an alliance.

Although there is some overlap of destinations, it can be observed that Frontier Airlines has
many destinations in South America while JetBlue focuses on U.S. cities. It would be a great
benefit for JetBlue airlines to expand its route network to more South American cities as
acquiring paperwork to fly to other countries may be a challenge nowadays. In terms of route
that do overlap, a merger between these two airlines would cut any excess competition and
excess takeoff and landing slots may be auctioned off to cut costs are to reallocate money to bid
for other destinations to expand the route network. With a larger airline, the brand will be more
well-known and a possible method of cutting costs, growing the brand name and growing the
airline would be to outsource some of the routes to smaller airports to regional airlines such as
SkyWest Airlines, Republic Airlines, Trans State Airlines along with their subsidiaries such as
ExpressJet, GoJet Airlines, etc. This would expand the route network of the airline without
increasing capital in investments (which is what most of the Big Three airlines have been
utilizing).
Appendix I - References
http://www.westjet.com/guest/en/about/airline-partners/index.shtml
http://www.ch-aviation.com/portal/airline/B6
http://wwwapps2.tc.gc.ca/Saf-Sec-Sur/2/ccarcs/aspscripts/en/quicksearch.asp
http://www.ch-aviation.com/portal/airline/F9
http://www.westjet.com/guest/en/media-investors/fleet.shtml
https://www.skyteam.com/
http://www.fool.com/investing/general/2013/12/18/are-airline-mergers-finally-finished.aspx
http://www.usairways.com/en-US/aboutus/pressroom/arriving.html?c=glmus_21225&re=1
http://www.forbes.com/sites/michelinemaynard/2013/12/09/what-to-expect-next-from-theamerican-us-airways-merger/
http://www.airliners.net/aviationforums/general_aviation/read.main/5684406/?threadid=5684406&searchid=5684406&s=AA+me
rger#ID5684406
http://www.usairways.com/en-US/aboutus/pressroom/arriving.html?c=glmus_21225&re=1
http://www.forbes.com/sites/michelinemaynard/2013/12/09/what-to-expect-next-from-theamerican-us-airways-merger/

http://www.forbes.com/sites/michelinemaynard/2013/09/05/3-reasons-why-airlines-cant-makefare-hikes-stick/
http://www.economist.com/blogs/schumpeter/2013/08/government-opposes-big-airline-merger

Appendix II Graphs

American Airlines Bonds Yield Curve

Timeline of Major Airline Mergers/Acquisitions and Bankruptcies

Historical Trend of Federal Funds Rate in the United States