AA Cargo will spend 2014 focused on its merger with US Airways.
In December, officials at American Airlines Cargo were finally told what they had been waiting a long time to hear: Start talking with your colleagues at US Airways because the merger is finally complete.
The two carriers publically acknowledged they had been meeting together since August 2012, after rumors of the pending merger spread through the industry early last year.
The U.S. Justice Department nearly stopped the $11 billion merger from going forward, but reached a settlement with the two carriers in November, provided the combined airline relinquish slot pairs at Washington’s Reagan National, New York’s LaGuardia and other major domestic airports.
Even before the American-US Airways merger announcement, AA Cargo had been going through its own turbulence.
Dave Brooks, who was president of the division since 1996, departed in 2012, and Kenji Hashimoto came over from the passenger side to direct the operation. With the merger underway, Hashimoto will now move back to passenger operations to become the senior vice president of regional carriers. Taking his place is Jim Butler, who most recently served as managing director of commercial planning and performance, a job in American’s passenger business.
Butler started his new role at AA Cargo in early December and said he’s spent the first few weeks visiting customers and talking to them about the merger plan. He’s been telling freight forwarders that his vision for the new AA Cargo is in line with the foundation laid down by Brooks and Hashimoto.
“We have fairly similar styles,” he said, referring to his years working with Hashimoto. “I tend to be extremely impressed with Kenji’s direction and will maybe take just a slightly different angle on it.”
While American and US Airways officials have been talking amongst themselves for a while, they weren’t able to look at each other’s data or make any moves toward integration until December. With that in mind, Butler said 2014 is going to be about pushing the integration forward and getting everyone in the two organizations up to speed, but that total integration won’t come quickly. There isn’t a set time table that he could share, but he said customers will soon start to see some results of the merger.
Much of this year will be spent aligning IT systems and policies, and developing a plan to take forward, Butler said.
He added it’s too early to know how much of US Airways’ cargo team will make the jump to American, just as it’s a bit premature to talk about how the new AA Cargo will operate. One thing’s certain, he said, the two carriers’ networks should fit well together.
“This is going to be positive from a network perspective,” Butler said, adding that air cargo customers will witness a significant expansion that comes from adding the two carriers’ coverage areas.
He said the customers that he has spoken with so far are not concerned about reductions in service due to the merger and are “cautiously optimistic” about the path forward, seeking to make sure the integration between the two airlines is done “the right way.”
“I think we are very well positioned to do that; not to say that there won’t be a hiccup or two along the way,” he said. “So far, I’ve been very encouraged by the work that the team has done, and I’m optimistic that we’re going to execute on this as well as possible.”
Global-Domestic Mix. The two carriers each bring some different perspectives to air freight. American has in recent years focused heavily on building its international network, while US Airways has kept its aim on domestic services.
“As you add those two networks together you really start to see the ability to add more lanes, especially from an international perspective,” Butler said.
He cited AA Cargo’s first-ever service to Hong Kong and the start of service on a Dallas-to-Shanghai routing. On Jan. 8, AA Cargo commenced wide-body aircraft service between Los Angeles and Sao Paulo.
Yet, Butler said it would be wrong to characterize the new AA Cargo as putting all its efforts on opening new international lanes. American, for example, set up nine new cargo stations in the United States last year.
Butler also maintained the AA Cargo will continue to be a major part of the overall American Airlines. He said senior leadership at the carrier values the contribution of the cargo department.
“We see this as a very strategic piece of the business, and I anticipate having some very aggressive goals for us, and I think we have the tools and the resources to get there,” he said.
Competitive Factors. The new AA Cargo will move forward in an industry that’s still limping along after years of slow cargo activity. The carrier ended the year with a 12.9 percent December rise in cargo volumes to 168,853 cargo ton miles; total growth for 2013 finished at 1.84 million miles, representing a 4.3 percent increase over 2012. Delta Air Lines, one of AA Cargo’s primary domestic competitors, experienced a 1.8 percent drop in cargo volume to 189,230 ton miles in December, finishing off a year that represented a 1.4 percent downturn in cargo activity. (For the year, Delta flew a total of 2.35 million cargo ton miles.) United Airlines saw a 1.2 percent reduction in its December revenue ton miles (the measurement of a single ton of goods transported one mile, which is used to show cargo activity), finishing the month at 197,131 miles; for the year, revenue ton miles were down 10 percent at 2.21 million miles.
According to the International Air Transport Association, worldwide cargo ended 2013 on an upswing, with international demand rising 6.1 percent in November, compared to the same period the year before. North American carriers saw a 2.5 percent rise in cargo demand during that period. Even so, domestic cargo, which will be a larger focus for American now that US Airways is in the fold, faces competitive pressure from ground transportation providers.
“These trucking networks have gotten faster,” Kevin Sterling, an air freight analyst at BB&T Capital Markets, said. “You’re seeing some of that domestic air product come out of the air and into these trucking networks. Intermodal’s improved. Across the board, these ground systems have gotten so much better.”
From talking with people in the industry, Sterling gets the sense that the merger between American and US Airways will ultimately be good for cargo carriers, as it will drive up prices, especially if American ends up eliminating some capacity when it consolidates the two networks.
“I would think if you’re an all-cargo operator, you think this is good. From a shipper perspective, we may see your rates tick up, particularly if the economy gets a little stronger,” he said.
Brandon Fried, executive director of the Airforwarders Association, said his members see the merger as a good move overall, but are somewhat concerned about rising freight rates. He added, however, that competition from ground transportation and a “swift and vigorous” response from the remaining major passenger carriers that focus on cargo — Delta, United and Southwest— should help keep rates in check.
The Justice Department will auction off slot pairs at airports given up by American and US Airways to other airlines, such as Southwest and JetBlue.
As a result of the divestitures, American announced Jan. 15 that it would no longer offer daily, non-stop service between Reagan National and 17 cities including Detroit, San Diego and Minneapolis. The carrier also said it will add a second non-stop flight between Reagan and Los Angeles, moving a US Airways flight between Reagan and San Diego to the new route. American’s upcoming changes at LaGuardia include removing non-stop flights to Atlanta, Cleveland and Memphis, Tenn
Better Together. Separately, American and US Airways were going through financial hardship, and Fried said forwarders were worried about the viability of the two carriers if they had remained separate. American needed to get the merger approved by a bankruptcy judge as part of its goal to financially right itself.
“The general consensus at this point is that the combination of both US Air and American was the best hope for the future,” Fried said. “The name of the game, at this point, is keeping planes flying.”
By now, forwarders have become used to airline mergers as a result of the current business environment and are able to adapt their operations and services to these developments, Fried said.
Butler understands mergers tend to put customers on edge and uncertainty about the future can breed some anxiety, but he sought to reassure forwarders and shippers that AA Cargo will remain dedicated to their needs and requirements.
“I know shippers are potentially nervous about what’s going to happen, but the plan that we have in place is very, very strong,” he said. “We have the right team here.”