Airline stocks have been flying high this year as oil prices have tumbled and consumer confidence has remained elevated. Still, the trend towards combination in this industry has been pretty strong, and looked to continue with a planned merger between American Airlines (AAMRQ) and US Airways (LCC).
However, the Department of Justice blocked the merger earlier in the year, based on anti-competitive concerns. The crux of the DOJ’s argument focused on a few airports around the country where a merged airline would have a ‘fortress hub’ or at least a very strong competitive position, allowing them to significantly raise prices for local customers.
It appears as if American and US Airways have found a workaround to this issue though, and are now likely to obtain approval to combine. In order to gain this permission, American and US Airways had to give up some of their slots and facilities at several key airports around the country. The biggest loss for the merged airline focused in on Reagan National airport just across the Potomac from Washington D.C., and probably a favorite for many influential people in the district who didn’t want to pay more in fares.
Currently, US Air and American make up roughly 70% of the travel from this airport, so they will be required to give up 104 carrier slots in order to get approval. The deal doesn’t stop there though, as it will also have to give up 34 slots at La Guardia, and then a few at key airports at major hubs across the country including Boston Logan, Chicago O’Hare, Dallas’ Love Field, LAX, and Miami, according to a MarketWatch story.
Despite having to give up slots at some of these very important airports—many of which American already has a huge hub presence at—shares of AAMRQ surged following the merger news. The stock was up over 25% initially following the report, but was higher by roughly 17.6% at time of writing. Meanwhile, US Airways saw their shares lose about 1.5% on the news, while the company’s stock was also halted for a short period too.
Other impacted stocks included discount airlines such as Southwest (LUV), which rallied by 1.5%, as they are expected to take some of the gates at New York’s La Guardia airport. JetBlue (JBLU) also gained, up roughly 4.4% at time of writing, as it looks to get some of the gates at Reagan in the settlement, boosting their presence at this important airport for this East Coast-focused airline.
Long Term Consequences
This news could be pretty good for the industry at large for a number of reasons (though maybe not so much for customers). Some efficiencies between US Air and American could definitely be created, and help to boost operations for this new airline, especially at airports where it will have a dominating presence.
Additionally, getting a bigger role in D.C. looks to be very important for JetBlue, particularly given that their focus is already in New York and Boston, and air travel between these three is enormous. Southwest could also benefit from more at La Guardia, potentially making it the 4th most used airline at the airport.
It is also worth noting that the Zacks Industry Rank for airlines is extremely favorable at this time. Currently, it is just outside of the top 10%, while both AAMRQ and LCC have Zacks Ranks of #1 (Strong Buy), while JBLU and LUV have Ranks of #2 (Buy). So a further reduction in competition, coupled with tumbling oil prices, could boost the prospects of this surging sector even more, making now an interesting time to buy the space.
But what do you think? Who are the winners and losers from this pending airline merger?
Let us know in the comments section below!
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Author is long LUV.