American Outlines Plans For TWA Integration

World Airline News, May 18, 2001

Combined Carrier Will Eventually Operate Three Types Of Aircraft

Now that the U.S. government has given American Airlines its blessing to purchase Trans World Airlines (TWA), American has begun an aggressive integration process addressing strategic issues including fleet management and the delicate elements of labor relations.

American gave a detailed presentation to U.S. analysts May 10 outlining its plans to integrate TWA's fleet and employees into its network, as well as projected integration costs and revenue synergies.

At the time of its announcement to acquire TWA, American indicated that renegotiating TWA's leases to reflect American's more favorable credit rating would result in lease savings of US$ 80-$100 million, but the amount increased to US$200 million once lease negotiations were complete. The total cost of the transaction decreased from US$3.5 billion to US$2.8 billion.

American's objective in fleet integration is achieving maximum commonality through three fleet types by the end of 2003. Those types include Boeing MD-80s, 717s and 757s. The airline also plans to retain a sub-fleet of Airbus A300s to deploy on Caribbean routes. The short-term plan for the fleet of A300s is to remove 10 aircraft from North Atlantic routes, primarily London, and convert them from a three-class to two-class seating configuration for flights in the Caribbean. The airline said operating the A300s in the same class configuration eliminates yet another sub-fleet type. The redeployment of those aircraft frees up the existing narrow body 757s and 737s for integration into American's domestic system. The advantage of this fleet configuration, according to American, is avoiding ordering a substantial number of additional narrowbody aircraft. The carrier stated the number of aircraft withdrawn from the Caribbean routes and available to the domestic fleet equates to 19 737-800s.

TWA had placed orders for 38 A318s and 25 A319s, but American has decided to reject those orders. The 717 is a similar aircraft to the A318. The A318 seats 107 passengers with a 2,800 nautical mile range, while the 717 is configured with 106 seats and has a capacity of 1,647 nautical miles. TWA also had placed an order for 35 717s and currently has 15 in its fleet. Adam Pilarski of Reston, Va.-based Avitas called TWA's decision to purchase both A318s and 717s "bizarre." American plans to take delivery of 15 of TWA's original order for 35 717s.

Pilarksi told World Airline News American's decision to incorporate some of the 717s into the integrated fleet makes the aircraft "look better." He said the A318 probably does not have the same meaning to Airbus that 717 has to Boeing because the 717 was the only program "Boeing kept as part of the McDonnell-Douglas family."

Airbus probably is not terribly concerned about losing TWA's orders, according to Pilarski. "Airbus didn't think this (TWA's order) would go anyplace," he said. Other airlines that have ordered A318s include America West Airlines, Frontier Airlines, Air France, Air China, Egypt Air, and British Airways.

Although carriers are impressed with 717's performance, especially its fuel burn, Pilarksi said the aircraft could pose some interesting problems to American in the future. He said regional airlines are increasing the number of seats in regional jets from 50-seat to 70 and 90-seat aircraft, which is close to the 717's seating capacity. "Eventually what does American want to do? What will be their strategy with American Eagle?" he asked.

Aside from potential conflict of interest with regional carriers, Pilarski also is impressed with American's fleet integration plans, including reconfiguring TWA's aircraft with more room in coach class. Achieving fleet commonality is logical, according to Pilarksi, because it creates a smoother, cheaper maintenance operation.

Integration Challenges Remain

Although the financial community feels positive about the initial incorporation of TWA into American's network, there are still significant issues to resolve, including labor. In a research note, Merrill Lynch analyst Michael Linenberg stated that up until this point, American has been careful of not "rocking the labor boat."

American said application of its wage rates and work rules to TWA employees is scheduled for completion in January 2002, with estimated annual costs of US$260 million.

The airline has come to a tentative agreement with its pilots union, the Allied Pilots Association (APA), but pilot seniority integration was not addressed. American's pilots are scheduled to vote on the agreement later this month.

But it is obvious seniority is a crucial element in both labor negotiations and the integration of two major carriers. Rob Mark of Chicago, Ill.-based Mark Communications and an airline labor expert warns sooner or later "it will absolutely be an issue of American rocking the boat."

Mark observed American could potentially have an advantage in negotiating seniority lists with its pilots as a result of the APA paying a US$45 million penalty for actions occurring during American's 1999 merger with Reno Air. "They don't want that duplication," Mark said.