T-MOBILE AND THE FUTURE OF A MERGER
By Joe Brancatelli
October 16, 2013 --Want an idea of what commercial airline carriers could look like if the Department of Justice manages to block the merger of American Airlines and US Airways? Take a gander at a different kind of carrier, T-Mobile.
The No. 4 mobile-phone company last week rolled out a new program that slashes the price of international calls, all but eliminates texting fees and bundles free (if low-speed) overseas data roaming into basic rates. It's the third disruptive innovation from T-Mobile since the government scuppered its $39 billion acquisition by AT&T. In March, T-Mobile eliminated service contracts, a dramatic marketing change that won it more than a million new customers in the last fiscal quarter. And in July, it introduced a twice-a-year upgrade scheme that forced the nation's two largest mobile carriers to scramble and hastily match.
When the Justice Department's antitrust suit against American and US Airways goes before a federal district court judge in Washington next month, T-Mobile could be Exhibit A to prove that there's corporate life and innovative spark after a potential mega-merger. And T-Mobile's torrent of customer-friendly changes this year would also nicely twin with the Justice Department's argument that more competitors, no matter their size and comparative heft, is better for consumers.
The parallel is not an accident. The arguments that the Justice Department used to oppose the AT&T purchase of T-Mobile in 2011 are virtually identical to the case that it will lay out to stop the proposed $11 billion combination of American Airlines and US Airways. As with AT&T/T-Mobile, the government claims that an American/US Airways merger would mean too much market concentration higher prices for customers.
AT&T and T-Mobile bailed on their deal before a trial, but the two airlines have chosen to tell their side of the story to a judge. Just as AT&T and T-Mobile originally claimed, American and US Airways argue that pooling assets will give them the size they need to compete with the nation's two largest carriers, United Airlines and Delta Air Lines. They also claim three mega-airlines are the best way to ensure meaningful competition.
Failing an out-of-court settlement—which now looks unlikely—U.S. District Judge Colleen Kollar-Kotelly promises a speedy trial that will begin on November 25. She has promised to rule by January 10, just days before an amended merger agreement between American Airlines and US Airways expires.
Should Kollar-Kotelly rule in the airlines' favor, we know what the aviation world will look like. American and US Airways would own a combined 21 percent share of the market and four carriers (American, Delta, United and Southwest) would control 80 percent of the U.S. market. Then the merger itself will either go somewhat smoothly, along the lines of Delta's 2008 combination with Northwest Airlines, or disastrously awry, like United's 2010 deal with Continental Airlines. Either way, an oligarchy would rule the domestic skies, with only peripheral competition from JetBlue Airways, Alaska Airlines and other small players.
But what if the Justice Department's more-competitors-are-better meme prevails with Kollar-Kotelly? What would life on the road look like if business travelers could choose between two mega-carriers (Delta and United), independent American Airlines and US Airways and the other airlines?
That's where the T-Mobile analogy really kicks in. Both American and US Airways would be forced to be compete, and, one hopes, offset their smaller respective sizes with genuine innovation, unique marketing, new policies and creative flying.
The larger airline, the current American, would have to exit bankruptcy and forge peace with its unhappy labor unions, the driving factor behind the US Airways tie-up. But we know an independent American's strategy: the so-called "cornerstone" plan that focuses on adding service to and from the world's major business cities. American is already competitive in New York, Chicago, Dallas and Miami and is building up in Los Angeles. It has some working agreements with Alaska Airlines (Seattle) and JetBlue (New York and Boston), too. Through its Oneworld Alliance partners, it has access to hubs in cities such as London, Tokyo, Hong Kong and Sydney. Oneworld is also adding Qatar Airways, the first of the fast-growing Gulf carriers to join a global alliance.
The more intriguing question is what happens to US Airways as an independent. It would continue to wrestle with its own labor problems, a holdover from its 2006 merger with America West. It has no product in the fast-growing premium-economy segment. Although it has done a nice job upgrading its international business-class cabin, its own overseas flight network is small and it would either remain the junior partner to United Airlines in the Star Alliance or subordinate to American if it joins Oneworld. Its frequent flyer program is weak on elite benefits.
More seriously, US Airways is an also-ran in the most important U.S. cities, where the bulk of profitable flyers are located. By concentrating virtually all of its flying at hubs in second-tier markets such as Philadelphia, Charlotte, Phoenix and Washington, US Airways has turned a tidy profit in the last few years but has little room for growth. To remain competitive in the largest markets and attract corporate business, US Airways has been a cut-price operator on one-stop flights. Ironically, that's one of the market forces that the Justice Department argues will be lost if the merger with American is permitted.
In other words, US Airways is approximately T-Mobile after the AT&T buyout floundered. T-Mobile responded with a revamped product line-up and innovative pricing strategies. It also stabilized its financial position with a merger last year with a smaller competitor called MetroPCS.
There's no reason US Airways couldn't become the T-Mobile of the airline industry. It could copy JetBlue's strategy of offering more value for money to flyers with roomier seats, easy-to-understand one-way pricing and perks like a free checked bag for every traveler. Or it could follow the path of so-called ultra-low-cost carriers Spirit Airlines and Allegiant Air and completely unbundle the flying experience. Or it could forge its own, totally innovative approach in an industry that is always desperate for new ideas.
Whatever paths the independent American and US Airways might choose, that's what the Justice Department will be trying to sell Judge Kollar-Kotelly next month. With a wink and a nod, it'll point to T-Mobile's run of innovation and go-it-alone subscriber growth and suggest that, not another mega-carrier, is exactly what the airline industry needs.
ABOUT JOE BRANCATELLI Joe Brancatelli is a publication consultant, which means that he helps media companies start, fix and reposition newspapers, magazines and Web sites. He's also the former executive editor of Frequent Flyer and has been a consultant to or columnist for more business-travel and leisure-travel publishing operations than he can remember. He started his career as a business journalist and created JoeSentMe in the dark days after 9/11 while he was stranded in a hotel room in San Francisco. He lives on the Hudson River in the tourist town of Cold Spring.
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