US Airways and American merger: What it might mean for Los Angeles

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Soon, American Airlines and US Airways will merge to form the world’s largest airline – assuming the deal is approved by regulators. The new carrier will be called American, but much of its top management, including chief executive Doug Parker, will be from US Airways.

What does this merger mean for Los Angeles?

American operates a hub at Los Angeles International Airport, while US Airways has its West Coast base in Phoenix. There’s a lot of speculation on how the combined carrier will approach its Western operations. It’s early, so it’s not clear that anyone knows how the two hubs will coexist.

Two months ago, I visited US Airways in Phoenix. I spoke with Andrew Nocella, senior vice president for marketing and planning, about the approach the new American could take in Los Angeles. The conversation is a tad stale — hey, I didn’t have the blog in April — but it should give a decent idea of what the future might look like.

In recent history, what has been US Airways’ approach to LAX?

We have had a strategy at US Airways that has focused around four key hubs. In our case they are Phoenix, Charlotte, Washington, DC and Philadelphia. They are points of strength for us. They have a lot of connectivity for us. As we looked at our business, and we looked at the margins we needed and where we needed to be and where we wanted to go, we found that has been working for us. I tend to think it was a long transition out of a bunch of markets that we were big in, but as a somewhat niche player in the marketplace we knew we couldn’t be big in every market. We focused efforts in the places where we thought we could be most profitable. In this particular case, Los Angeles is a great spoke for US Airways today. It’s a profitable operation for US Airways so we are very happy with it.

How might the future look?

In the future, things will be a little bit different, as we’ll be one of three large mega carriers here in the country. Los Angeles is a top business market – No. 2 in the country behind New York. We intend to make sure we will keep the operations in all nine (new American) hubs going forward. Los Angeles and New York are a very important to the strategy. The strategy of a stand-alone US Airways is different than the strategy of a merged US Airways and American. Times change and we will adjust our business philosophy and strategies accordingly.

No airline dominates Los Angeles, and the domestic market is shared among American, United, Delta and Southwest. Why doe you suppose that is?

I think it’s because it’s such a large business center. Also, it has unique geography. As a domestic hub, Los Angeles’ geography is not optimal. It’s as far west as you are going to go, basically – other than going to Hawaii. Because it doesn’t have the same type of centralized geography as most of the other hubs in the country, you wound up with a situation where multiple airlines are kind of going after the same bread and butter. As a result, you have the market divided amongst really four major players – the three legacy airlines now and Southwest.

How has this L.A. market been for US Airways?

It’s a lucrative operation for US Airways. I don’t know the economics of American Airlines. I haven’t seen the numbers. But I am optimistic that LAX is going to be a growing part of the combined company and hopefully a bigger Asian gateway for the company over time. I’m bullish on its role for the future. Really, the question mark for LAX in the future is going to be its facility constraints. Today, one thing I do know is that American is completely full in their concourse. The new (Tom Bradley International Terminal) is a little bit late, which has some cascading implications. We are soon moving to Terminal 3, which is across the horseshoe, so we are going to have to figure out how to rationalize LAX issues so we can create a level of convenience for our customers and a platform for growth.

Could we see some growth to Asian destinations from Los Angeles?

American has a flight to Tokyo and to Shanghai out of there. I think we haven’t made any final decision on this front but it wouldn’t shock me if we would continue to develop Los Angeles as the primary gateway to Asia going forward.

For airlines, LAX has some of the highest fees in the country. And those fees are expected to rise in the future, as the airport continues to pay for its modernization plans, like the new international terminal. Is this a problem?

I don’t know the details about LAX to be perfectly blunt. It’s a small station to us relative to our major hubs. Airport costs are important to understand. I’ll give a shout out to our airport director in Charlotte who we think is is the best in the country, who offers a world class product with an in incredibly low cost. Charlotte, per emplanement is our lowest cost hub, yet it delivers the same full service as any other airport. It’s half the cost of Philadelphia, I know that. So it can be done at a reasonable cost. We would ask all of our airport partners to do their best to make sure their costs are competitive.

Airport costs are that important?

It is material, and I think people underestimate its importance. I hear that a lot. People say, ‘This is just a 1 percent here, or a 3 percent increase there. Or it’s a few dollars.’ And the government does this all the time on taxes, too. You just charge the customers a couple more dollars. And it’s just not that simple. First of all our margins are incredibly thin. In a good year, we run a four to five percent margin. So a small increase in our costs could have a dramatic impact on our bottom line. We are incredibly sensitive to every line item. At the end of the day we are trying to offer the best and lowest fares to our customers. If we have to charge higher fares, as a certain point we extinguish demand. That’s not what we want to do. We want people to be able to take that vacation, go on that business trip.

But you do want the airports to modernize and get better, right?

Let’s just makes sure that the airport improvements are absolutely necessary. Customers are flying us and going through airports not for the pleasure of those experiences but for the pleasure of the family vacation or for the business reason. Our primary mission is to make sure (we deliver) what they really want, which is to get them there on time at a low fare.

The big construction project now at LAX is the new almost $2 billion international terminal. Because of the way costs are calculated, US Airways will have to pay for a small share of the terminal even though it has no international flights. Is that fair?

It’s not uncommon at airports for costs share to occur. As terminals need to be modernized over the decades, instead of one airline bearing the full burden of the modernization, it’s not uncommon for it to be spread across multiple airlines. I don’t find that to be a gigantic problem as long as some day, US Airways, in a case like that, would get its modernization as well. Clearly at LAX we are at Terminal 1 today. We are moving to Terminal 3.  We appreciate the investment that has been made at Terminal 3.

You’ll be moving out of Terminal 1 to accommodate a major renovation. Is that what US Airways wanted?

We were happy in Terminal 1.  We have a club there. We have been there for forever, basically. It would be our desire likely not to move. But I think they made a pretty compelling case that a renovation in one needed to occur and that three would be pretty good for us. I think over time they presented us a business case that we think was OK. We are in the process of moving now. I think some time in September of October we’ll be in there. And significant terminal renovations at Terminal 1 can go on. So life changes, life evolves. We recognize the need to compromise. But we were not anxious to leave terminal 1.

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