Can American Airlines find a Qantas updraft?

Qantas' fleet grounding has been hailed in the US, where all major airlines are under bankruptcy protection. But can companies like American Airlines solve their problems without taking the Qantas route?

Qantas’ US alliance partner, American Airlines, has now been under Chapter 11 bankruptcy for more than seven months. Qantas shares have fallen dramatically during that time because the market realises that the Australian airline faces similar problems to its US partner – higher costs than its rivals. In today’s tough world, uncompetitive enterprises, whether they be airlines or confectionery makers, go out of business. Middle and some top managers, workers and unions do not always understand this.

Whereas the Australian government hates Qantas for grounding the airline earlier this year, in the US the company is admired for attempting to become competitive without bankruptcy.

American is the last major US airline to enter Chapter 11 bankruptcy protection, underlining the cost pressures of the global aviation market that Qantas Airways has better managed.

"I think Qantas has been a lot smarter, seeking those regional codeshare kinds of alliances that allow them to tailor to the market flow at the time,” Frost & Sullivan aerospace and defence industry manager Wayne Plucker tells Business Spectator.

"That’s something American can’t do, short of parking the airplanes.”

The reason why American is so stuck is that its costs are so out of whack with its rivals. Plucker says that its pilots are paid 10-20 per cent more than other US carriers, while flight attendants collect and extra 5-10 per cent and mechanics also receive more than the industry average.

While Qantas enjoys a profitable domestic arm, American has watched its bread and butter routes between New York, LAX and San Francisco slide into unprofitability thanks principally to labour costs.

"The airline has been using companies like Skywest and Comair to pick up a lot of those regional routes,” says Plucker. "Originally they did it with the idea of taking them back when they returned to profitability, the reality is they’re never going to get them back at this point.”

It means that international alliances are to some extent useless because there’s no point feeding foreign travellers into a network that’s not profitable. This illustrates why Qantas will fight Virgin Australia hard domestically to retain its current position, particularly in the business market. As American shows, if it fails the consequences will be dire. American wages have to come down and workers have to be more flexible if the carrier, once the biggest and best organised US carrier, is to have any meaningful future.

The US Transport Workers Union has been campaigning for an American merger because it believes a deal holds the best chance of preserving some of the excessive wages.

The parent company of American Airlines, AMR Corp, has resisted the move up until this point, but has now acknowledged that a deal could be the best route.

But it’s been clear for a long time that American could be left without a suitable dance partner because Delta Airlines and United Airlines went into bankruptcy protection earlier and formed mergers with Northwest Airlines and Continental Airlines, respectively. Merging with either of these two players would inevitably throw up antitrust issues.

There’s a compelling case for American to link up with US Airways, fifth largest by traffic, which is keen to do a deal and even won the support of airline unions.

But there’s the added problem that, as Qantas has found, airlines can be stubborn beasts to manage. US Airways itself was lifted from of bankruptcy by America West seven years ago, with US Airways Group keeping the name.

However, to this day the staff of both airlines have not been merged. Pilots for America West don’t fly US Airways planes. What would the picture look like with American on the books?

To some extent American’s management lethargy can be traced back to the culture created by the decision that set it on course for national domination in the first place.

Back in the 1960s and early 70s the dominant international carriers were Trans World Airlines and Pan American World Airways. American was in third place, but so far behind that it may has well have been nowhere.

"But perhaps the difference for them is they had a national route structure that the US congress denied to PanAm and TWA, they could only go into the main hub hubs to feed their oversees routes,” says Plucker. "Effectively the US congress killed TWA and PanAm.”

This helped propel American into the number one position heading in to the 21st century. It even merged with TWA in 2001 when the carrier finally ran out of puff.

American enjoyed a big chunk of the lucrative business travellers market, something Qantas guards closely. But a lack of response from management meant that even incremental improvements at its rivals soon translated to lost market share for AA. And with that, another cash stream dried up.

Despite all of this, American was strong enough to cope with the global financial crisis and the aftermath, while ignoring the cost pressures that its rivals were dealing with directly.

It’s symptomatic of a focus on next quarter’s earnings that all US airlines have been guilty of at some point in time.

Plucker says it’s been recognised in the market that Qantas has had its eyes on the horizon, where the same threats are found; labour, fuel prices and government-owned foreign competitors. The decision to ground the fleet to bring its industrial dispute with unions to a head gained a lot of attention in the US.

If Qantas does ultimately have to go through something similar to its American alliance partner, it won’t be through lack of trying.

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