What to Expect From the New American Airlines

DOJ settlement should produce a more competitive airline industry

What to Expect From the New American Airlines

Congratulations to US Airways (LCC) CEO Doug Parker — the airline mega-merger he’s spent years pursuing has finally been cleared for takeoff.

Less than two weeks before the scheduled start of an antitrust lawsuit to block US Air’s planned merger with American Airlines, the Justice Department inked a deal to settle the matter. In return for the DOJ dropping the lawsuit to block the merger, the airlines must divest of facilities at seven U.S. airports — including 69 takeoff and landing “slot pairs” at Washington D.C.’s Reagan National Airport and New York’s LaGuardia.

Tuesday’s antitrust settlement with the Justice Department allows the $11 billion merger between American Airlines (AAMRQ) and LCC to move forward, creating a global colossus with more than 6,700 daily flights to 336 destinations in 56 countries.

US Air President Scott Kirby told reporters Tuesday that the next few weeks will be spent working through the legal issues associated with the close, as well as a number of employee issues. If all goes well, customers will begin to see the first signs that US Air and American are a single airline on Jan. 7, with reciprocal frequent flyer miles. That will formally kick off the process of integrating systems and obtaining a single operating certificate.

Looking ahead, here’s what it all means for the airlines, their competitors and their investors:

LUV, JBLU likely to benefit from divested slots: The DOJ has basically earmarked the divested slots for low-cost carriers, so look for the big winners here to be Southwest (LUV) and JetBlue (JBLU) — both of which have targeted East Coast business travel markets for future growth and have a history of scooping up divested slots in prime markets. Virgin America, however, which went on record opposing the LCC-AAMRQ merger, also could make a play for the D.C. or New York assets.

United and Delta face a tougher competitor: The new American will wield considerable competitive strength — despite having to divest prime assets in two hot East Coast markets. And Parker was not afraid to drop the challenge on United (UAL) and Delta (DAL), telling reporters, “The real change to our competitive dynamic is we’re…creating a stronger company that will be able to take more customers more places and create a third global competitor to the other two global networks of United and Delta.” US Airways was already winding down its participation in the Star Network codeshare alliance in preparation to migrate to American’s globally powerful Oneworld alliance. The official transition will begin early next year.

New planes, great financing: The combined airline will have some of the newest aircraft in the skies: Prior to its bankruptcy filing two years ago, AAMRQ inked deals with Boeing (BA) and Airbus (EADSY) for a total of 460 new narrow-body jets. The aircraft manufacturers ponied up $13 billion in financing to cover the first 260 of the jets — those fleet upgrades will give the combined airline an edge in fuel efficiency as well as marketing.

Don’t be surprised by systems glitches: In airline mergers, the second-hardest task after combining corporate cultures is merging technology systems. From reservations and check-in sites to aircraft maintenance and accounting systems, airline operations sink or soar on information technology. Expect an AMR-LCC systems integration to take years … and cost millions. The story of the United–Continental systems integration debacle is a cautionary tale for Parker. However, the delay caused by the antitrust lawsuit actually gave US Air and American extra planning time that may take some of the pain out of combining these complex systems. Still, don’t expect perfection overnight.

Some labor issues remain: Support from American Airlines’ unions was a critical part of making the merger happen. However, the unions representing some 30,000 machinists and ground workers are not yet satisfied. The unions say that until US Air “negotiates new contracts for its own IAM-represented employees, the new American Airlines will not get off the ground.” Parker has been here before, after the 2005 merger of America West and US Airways. The combined carrier can ill afford the distraction of a labor squabble, so expect these issues to be at the top of Parker’s “To Do” list.

Bottom Line

Investors who believed in this deal were handsomely rewarded for their faith. Shares of American Airlines closed up a whopping 26% to $12 on the news Tuesday — a far cry from the 25 cents shares were worth after the airline filed for bankruptcy two years ago — and a gain of more than 3200% over the past 12 months.

US Airways closed up a modest 1% yesterday, but the stock has gained more than 100% in the past year. Not bad for a merger that will create the world’s largest airline and generate an estimated $1 billion in annual savings beginning in 2015.

That said, I think all the good news has largely been priced in and these most recent gains are exuberance that overzealous regulators didn’t skunk the deal. The long-term outlook is strong — we are talking about $1 billion a year in synergies after all — but altitude likely will slip in the near term.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities. 


Article printed from InvestorPlace Media, http://investorplace.com/2013/11/new-american-airlines-arriving-whats-next-doj-antitrust-deal/.

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