Logistics of airline merger may be difficult, painful

By Susan Hooper
and John Duchemin
Advertiser Staff Writers

As Hawaiian and Aloha airlines begin taking the first tentative steps toward merging and ending more than five decades of fierce competition, the changes that will ensue promise to profoundly reshape the future of Hawai'i interisland travel.

Greg Brenneman, chairman and chief executive of the new Hawai'i carrier, must mold one profitable airline out of Hawaiian and Aloha. Richard Ambo • The Honolulu Advertiser

But if previous airline mergers are any indication, some of the changes that will be needed to succeed will be painful and unpopular and will radically remake everything from fares and aircraft to the new carrier's work force.

In the long run, the airline's success will hinge on its ability to do all of these complex, painful tasks while keeping travelers, employees and government regulators happy. The health of the state could hinge on the success or failure of Hawai'i's only major carrier.

"It's basically going to be one airline deciding the fate of the interisland market," said Fredrick Collison, professor of transportation and marketing with the University of Hawai'i's School of Travel Industry Management. " ... Maybe in the short run it makes sense. In the long run I don't think it's good for Hawai'i. ... it may not be in the best interest of the flying public from a standpoint of fair competition, since there will be little, if any, competition."

Daunting challenges

The challenges facing the carrier are daunting, and those who have studied airline mergers on the Mainland say they can be easy to mishandle, in large part because of the sheer scope and complexity of the enterprise.

"Almost routinely and across the board, there is great customer-service disruption," said Kevin Mitchell, chairman of the Business Travel Coalition, a Radnor, Pa., lobbying group that represents the travel interests of large corporations.

"These problems come from integration of systems, processes, work rules and procedures. It's an awfully complex set of requirements to begin with. When you have to go and merge, it just takes a long, long time and the industry does not have a history of doing it well."

In 1986, Northwest Airlines merged with Republic Airlines, a once-bitter rival also based in Minneapolis-St. Paul. The combined airline ended up controlling nearly all of the regional market — and quickly raised rates sharply, according to George Wozniak, president of Hobbit Travel, a Minneapolis travel agency.

But higher rates did not bring better service. The airline not only cut dozens of flights to the West Coast, but also had trouble combining Republic's and Northwest's baggage and reservations systems.

"Northwest and Republic had a mountain of problems I don't think they ever thought would become problems," Wozniak said. "They had two different accounting systems. They had to merge two different cultures ... They had problems with seniority. They had big problems merging baggage handling groups. The baggage handlers said, 'If you don't do it our way, then we'll just lose everyone's luggage for a while.' "

The merged airline also had trouble consolidating computer systems, which led to lost reservations and tickets, Wozniak said.

"Customers were just screaming — they lost their seats, lost their bags, and there were delays beyond comprehension, and this was after a year and a half," he said. "These problems were immense and disruptive to passengers at all levels —and for all this rotten service, we were lucky enough to pay the highest rates in the country. It was the worst thing that could possibly happen to Minnesota aviation. Nothing could be worse than going from two to one, when the one gets a hub monopoly."

Observers familiar with both the Northwest-Republic and Hawaiian-Aloha mergers say, however, that Hawai'i's merger may fare better because the carriers are more similar than those in the Minneapolis merger.

"It's much simpler when you have two airlines with similar equipment, similar routes and similar pay structures," said Robert Gould, a Hawai'i resident since 1967 and a Northwest pilot from 1965 to 1998.

But there is general agreement in the industry that Greg Brenneman, the former Continental president and chief operating officer who will be chairman and chief executive of the new Hawai'i carrier, faces a huge challenge in molding one profitable airline out of Hawaiian and Aloha.

Brenneman is widely praised by airline analysts, and his experience in helping to transform Continental from a failing to a profitable and dynamic airline has given him, at 40, an almost legendary stature in the industry. But he has never guided a company through a merger, and observers say he will be hard-pressed not only to build profits but also to stave off a potential public-relations nightmare.

"Airline mergers, in my opinion, always prove difficult as you try to integrate fleet types and work forces, at least in the short term," said Raymond Neidl, an airline analyst at ABN Amro Securities LLC in New York. "However, Greg Brenneman is a very skillful executive. If anyone can do a merger, I have a lot of faith in him."

Fares expected to increase

Among the biggest changes, analysts say, will be fares. Conventional wisdom in the industry is that they ultimately will increase, even though the new company has committed to keeping some at current levels for two years and to working with the state attorney general's office on pricing.

While it's not clear yet how fares will be affected, Brenneman acknowledges that he likely will be overhauling the current pricing system, which does not allow for discount fares at off-peak hours and higher prices during peak travel times. But the airline will have to carefully monitor customers to keep from raising rates too much, some industry experts say.

One of the keys in determining fares will be how much the airline can cut other costs, said Scott Gillespie, principal in Travel Analytics, a Cleveland firm that arranges ticket contracts between large companies and major carriers.

"If they can unload the excess planes and possibly sell or lease any excess gates, that's going to take their fixed costs down, and that will give them some room to actually let business fares stay where they're at," Gillespie said. But, he added, "if they're truly the only carrier, they will have the opportunity to raise fares across all the fare classes, and there's obviously not much you can do in response to that."

Another significant change likely will be with routes. The two carriers have the greatest duplication of routes in the interisland market, and that's the area where consolidation is likely to occur first, Brenneman has indicated.

While it also is not known yet how, or which, routes might be affected, those that are most heavily traveled — Honolulu-Kahului, Honolulu-Kona and Honolulu-Lihu'e, for example — are likely to remain the best served, even though the number of flights and choice of travel times is expected to decrease, analysts said.

But travelers going from one Neighbor Island destination to another may see fewer flights, since those routes are less traveled. It's even possible that the airline would consider a "hub-and-spoke" system, with most Neighbor Island flights going through Honolulu.

"That's almost the way it is now," said Carlos Noa, general manager of Lahaina Travel on Maui. "With Maui to Kaua'i, Aloha used to have a nonstop flight, but not any longer."

Brenneman has said the two carriers' Hawai'i-West Coast routes are "doing very well," but observers say some consolidation on similar West Coast routes such as Las Vegas and San Francisco — where both carriers fly — also is likely.

But perhaps one of the most difficult challenges will be combining work forces. Brenneman estimates that "less than 600" employees out of a combined work force of about 6,000 people are likely to lose their jobs, and that union contracts will be renegotiated for the new company.

Most Hawaiian and Aloha workers are union members, and their benefits — everything from the type of aircraft pilots fly to annual vacation schedules — are keyed to seniority, which also determines who gets laid off.

"In the airlines, seniority is everything," said Gould, the retired Northwest pilot. "The merger of the seniority list is extremely important in an airline merger."

Last week, representatives with the local pilots unions indicated they supported the merger and had begun talking with Brenneman about the future.

Aircraft must merge, too

Brenneman also faces the challenge of merging two airlines with totally different aircraft: Aloha has three types of Boeing 737s; Hawaiian has been moving to eliminate its DC-9s and DC-10s in favor of a fleet of only Boeing 717s and Boeing 767s.

Brenneman has said he expects to simplify the fleet of the new entity into just two types of airplanes: those for interisland service and those for long-haul flights. Although he has not indicated which aircraft would be kept, he said he might do so by "trading out planes" with Boeing, which has been left with excess inventory in the industry slowdown that followed the Sept. 11 terrorist attacks.

But any type of inventory adjustment would ultimately ripple through the work force, since pilots and mechanics are trained to do their jobs on certain types of aircraft.

"If you get rid of (planes), what happens to the pilots, mechanics and the maintenance base?" said Wozniak, of Hobbit Travel. "It's a real ripple effect. They say they'll keep these people and cross-train them, but that never seems to happen."

And as Brenneman began meeting last week with employees of both airlines, analysts who follow airline mergers remained cautious, suggesting that even if the union is ultimately a financial success story consumers may see little benefit.

"No one ever would say that taking two or three choices down to one choice is good for the consumer," Wozniak said. "Price and service suffers. Everyone gets complacent."

In spite of the potential drawbacks inherent in a monopoly climate, however, Neidl, of ABN Amro Securities, was upbeat about the benefits to Hawai'i of the new airline.

"Hawaiian and Aloha have been beating each other over the head for years, and neither is making money," he said. The merger, he said, could be a chance to create a system that can serve consumers better by reducing costs, stabilizing pricing and becoming profitable.

With Brenneman at the helm, "they'll do a better job on management and serving consumers," Neidl said. "They may have some real deep discounts eliminated, but overall, consumers will get a better product with a more rationally run type of airline."

Reach Susan Hooper at shooper@honoluluadvertiser.com or 525-8064. Reach John Duchemin at jduchemin@honoluluadvertiser.com or 525-8062.