So far, investors have had no reason to complain about American Airlines' merger with US Airways. The company has reported a record profit in every single quarter since the merger closed.
So far, the American Airlines-US Airways merger has been fairly smooth. Photo: American Airlines.
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Customers haven't had much to complain about, either. The merger hasn't been perfect, but so far there haven't been any major integration-related snafus.
However, the biggest integration milestone comes this weekend, as American Airlines and US Airways merge their reservations systems. This is a key step in allowing the company to operate as a single airline. It's also been the occasion for major headaches in several previous airline mergers, including US Airways' own merger with America West -- and more recently, the United Continental merger.
The danger of integrationIn early 2012, as United Continental prepared to move to a single reservations system, CEO Jeff Smisek assured investors that the company had conducted four full dress rehearsals for the switch. Thus, management expected a fairly seamless transition.
Yet the "cutover" was anything but seamless. As United switched to the Continental Airlines reservation system, numerous glitches popped up, causing delays. Some check-in kiosks didn't work on the day of the switch, forcing customers to wait in line for agents. It didn't help that customer service agents from the United Airlines side were now working with unfamiliar software.
To make matters worse, United Continental had opted to launch its combined frequent flyer program on the same day as the reservation system migration. This added more headaches, as some frequent fliers' mileage balances weren't transferred correctly, many routine seat upgrade requests were not completed, and call center wait times spiraled out of control.
The United-Continental integration caused massive problems. Photo: The Motley Fool.
Worst of all, the problems lasted well beyond integration day. Technology glitches cropped up repeatedly at United during 2012and have remained an all-too frequent issue in the past three years. This has alienated United Airlines customers and damaged the company's profitability.
American Airlines' plan for a smooth transitionAmerican Airlines executives have plenty of experience with rough merger integrations. That's because CEO Doug Parker and several of his top lieutenants also led US Airways through its merger with America West a decade ago. The reservation system migration there was a disaster, leading to lost reservations, massive lines, and widespread flight delays.
American's management has tried to learn from its previous mistakes -- and those at United -- to ensure a smoother integration process this time. First, American Airlines opted to integrate the frequent flyer programs before the full reservation system integration in order to avoid tackling multiple big tasks simultaneously. The programs were combined successfully in March.
Second, management opted to use the technology systems of premerger American Airlines, because it was twice the size of US Airways. That minimized the number of employees who will have to learn a new system. The company also built a new interface on top of the American Airlines reservation system that resembles the old US Airways system, reducing the learning curve.
American Airlines has tried to avoid the pitfalls of previous merger integrations. Photo: American Airlines.
Third, in July, the US Airways website began funneling customers to the American Airlines website for post-Oct. 17 bookings. As a result, very few people still have reservations in the old US Airways system that is going away on Saturday. That should reduce the scope of any snafus in the reservation migration process.
Finally, American Airlines hired 1,900 extra employees a few months ago to cover for US Airways workers who needed to undergo training. These workers will also be available this weekend to respond to any problems that crop up. The increase in headcount has put pressure on American Airlines' unit costs, but these expenses represent insurance against the possibility of a damaging technology failure.
Will it work?On paper, it looks like American Airlines has done everything necessary to avoid an integration nightmare this weekend. By breaking up the integration process into as many stages as possible, it has reduced the complexity of what needs to happen on Saturday.
Of course, that doesn't guarantee a perfect result. But if the reservation system migration goes smoothly, it will pave the way for American Airlines to unlock significant revenue and cost synergies in the next year or two, keeping profits at record levels.
The article The American Airlines-US Airways Merger Faces Its Biggest Test on Saturday originally appeared on Fool.com.
Adam Levine-Weinberg owns shares of United Continental Holdings, and is long November 2015 $40 calls on American Airlines Group. The Motley Fool is long January 2017 $35 calls on American Airlines Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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