With the Continental + United merger looking likely by years end, many people have speculated what that means for US Airways and American. US Airways now becomes an outlier in Star Alliance -- the mini-US airline working with the "new" United, the world's largest carrier. There's no reason why they can't remain that way, but when a formerly 3-way North American partnership reduces to two through consolidation, it means US Airways's leverage just got destroyed (much as it did during the merger negotiations).

American, on the other hand, will be a distant third carrier behind Delta and United. Does that matter?

Some analysts seem to think the answer is yes. The consolidation trend might mean American is facing a brave new world of competition where they won't stand a chance against the other two big carriers. I don't see this happening. If anything, American will sink itself with its own labor costs, not because of yield deterioration thanks to competition. Remember, the whole point of the mergers are to keep or rise fares -- NOT to cut fares. Sure, mergers often leave room for LCCs to get in, but that's always a threat. And given the low route overlap and slot controlled airports, I don't see that happening.

So it was with much surprise that I read the report from Avondale Partners analyst Bob McAdoo a few weeks back.

(see here: TheStreet.com - American Needs US Air Merger: Analyst)

His thesis is several-fold -- here are his key points (paraphrased):

1) American needs a partner to bulk up feed for international service (and more int'l service).

2) US Airways' Philadelphia hub is the "most effective collector of traffic out of the north and eastern U.S. to Europe"

3) American's network is not well suited to int'l travel with it's mid-continent hubs in DFW and ORD

4) More consolidation is inevitable and required

I've already mentioned that I feel more consolidation is NOT inevitable or even required, so I'll leave that point be.

What I really want to talk about is Philadelphia and Bob's interpretation of its value. Philadelphia is one of the worst airports to fly into or out of in the U.S.  Aside from the new wing of the A terminal, it's not pretty or nice. Immigration and customs are ordeals with convoluted mazes and paths. Runway configuration is poor leading to delay problems. Now many of these same things apply at other international hubs, although I'd argue none to the degree of Philadelphia.

But let's leave all that aside. Let's assume for the moment that passengers don't choose based on those issues (even for a second time around?), which is a fair assumption for the most part.

Bob's comments are two fold about Philadelphia's grandeur:

- First, that it is more revenue generating from European flights than AA at JFK or ORD. Well, yes, it is a larger hub. More flights = more revenue. On a yield basis? My guess is it would be far worse performing. In fact, I think that's a very safe assumptions. So is AA interested in lower yielding international leisure passengers, even with a larger scale? Maybe, maybe not.

-Second, that it connects more passengers. Yes, this is true because PHL is a smaller market. JFK and ORD are both larger O&D markets for Europe. It's not entirely clear to me that this is a bad thing. Newark's Continental hub thrives because it has a huge O&D market and can supplement that with connections. Connecting passengers generally produce less yield since you have to pay to fly them on two flights and generally they don't pay the revenue to make up for that. A strong O&D market is more valuable, and loyal since any connecting passenger can choose between a myriad of connecting cities, but an O&D passenger can choose only between the ones flying those routes.

In summary, neither of these cited statistics make US Airways PHL hub attractive. In fact, they show how in many ways it is inferior. If AA wanted to boost European connecting traffic, it would expand its feed into JFK and boost European traffic out of it. It's feed into DFW and ORD is already large enough to pull traffic from the west coast and midwest. My guess is AA is relatively happy with its size to Europe and can feed it profitably with O&D and some limited connecting traffic. Building a connecting network to feed low yield passengers (and compete against CO, DL, UA, and US to boot) sounds like a losing proposition, especially at AA's cost base which is significantly higher than US thanks to its two bankruptcies.

In addition to this, US Airways makes an awful merger partner thanks to its old fleet, labor strife, and low yielding network focused on high LCC competition areas and leisure routes. That should be a non-starter for AA.

Now if US Airways ends up nearing another bankruptcy, there is a way where it's pieces become helpful elsewhere. American could acquire some of its eastern traffic, notably its DCA and CLT ops. Perhaps some of PHL as well. That could help with traffic flow to its hubs and an expanded footprint. Its western network could be attractive to some other folks (maybe Frontier, JetBlue, or airTran?).

In the meantime, if US Airways starts getting squeezed by the new United (which no longer really needs it for domestic or international feed) one thing it could do is switch to the One World alliance. It would give One World much more of a domestic footprint to rival the other two alliances and help feed AA and its partners flights to Europe and Asia. US could align some more traffic to JFK and join AA in its massive and beautiful Terminal 9 if it could get some slots. This is not unlike what Continental did when Delta and Northwest merged. It had previously been a happy 3-way SkyTeam group that suddenly was off balance. Continental too its leave and has reaped major benefits from it, not the least of which is positioning it well for its merger with United (if you believe that's a good thing, of course).

Now, I'm not sold that even this move would be helpful to either US Airways or AA, but I think it's worth exploring. But if AA knows what's best for it, it should stay far away from US Airways merger talk. That can only land them in serious trouble. AA should just stand-up and fight! They have a leading loyalty program, large presence in large markets, and a small but powerful international network. I'd easily take several flights a day to London Heathrow over one each to Venice, Rome, Madrid, and Dublin. 

So go out and compete, US and AA! One to two years of merger integration at United and Continental give you plenty of time to get a head-start. Look how United has thrived in the year since Delta and Northwest merged?

After all, the end-game is profitability and growth, not world domination.