A year-and-a-half after they embarked on a merger at the end of 2013, American Airlines and US Airways are finally ready to operate as a single carrier under the American Airlines (AAL) name. US Airways management initiated the merger process earlier, when American Airlines filed for bankruptcy in 2011. With this merger resulting in a very large carrier, if not the world’s largest one, there are implications for the airline industry, for American Airlines’ investors and workers, and for consumers who fly the airlines. The US Justice Department had initially opposed the merger, because of its potential to hurt consumers, but the merger was ultimately approved.
A Major Force
Once the two airlines complete their integration, which is slated for the end of 2015, the industry will see a major competitive force. The combination of American Airlines and US Airways will result in a giant Fort Worth, Texas-based company that will operate 6,700 flights everyday and will fly its nearly 1,000-airplane strong fleet to 339 destinations in 54 countries. The combined company will have eight hub airports as it is retaining American Airlines’ five hubs and the three US Airways hubs.
In addition, American Airlines has committed to a $2 billion plan to upgrade its planes. This includes putting in new seats and more Internet connections on international flights, as well as upgrading passenger lounges and airport facilities. The airline expects to replace its older airplanes with 500 new ones over a period that runs through 2022. All this means that other airlines will also have to upgrade in order to stay competitive.
Merger of Miles
While the end of the US Airways brand means that consumers will have reduced choice, which means reduced competition, they are likely to benefit in some other ways. For one, all those upgrades that American Airlines is embarking on will likely give them a better flying experience. American Airlines customers will have access to 400 new kiosks at airport gate areas and will have improved Internet access on their flights.
Another way that consumers will be impacted is that the two airlines have combined their frequent flier programs – American Airlines’ AAdvantage and US Airways’ Dividend Miles – into a single program. With this move, the US Airways program will no longer be available and accrued Dividend Miles have been absorbed into the AAdvantage program. And as for those who are participating in both programs, they have also been integrated into AAdvantage.
And in the second half of 2015, American Airlines expects to merge US Airways’ reservation system with its own system. The merging of other reservation systems has resulted in missteps in the past, but American Airlines is trying to ward off such issues by undertaking a gradual transition. Still, customers should be watchful.
As for the employees of American Airlines and US Airways, they too will have one less employer competing for their services. The company has come to a five-year collective bargaining agreement with pilots and flight attendants from the two airlines, and they will have to give up the contracts with their respective managements and embark on new contracts with the unified company.
When Doug Parker, then CEO of US Airways, and now CEO of the combined company, initiated the merger talks in 2011, American Airlines CEO Tom Horton was not in favor and Parker had to get the support of American Airlines employees for the merger. However, since then it has been tough negotiating with employees. Flight attendants rejected a combined contract that management came up with and the matter went into arbitration. The pilots had also been unhappy with management’s offer.
Investors Likely to Benefit
One group that is likely to benefit from the merger is investors. After all, the larger American Airlines will have opportunities to expand its market share and earn more. The company is also benefiting from its combined operations after oil prices started a downward dive in late 2014.
The stock market has bid up the price of American Airlines shares from close to $14 per share in early 2013, before the merger news broke, to higher than $45 in April 2015. And after raking up losses of about $17 billion annually in many of the years between 2001 and 2013, the company was ahead, with about $3 billion in earnings for 2014. Analysts expect the company to generate net income of more than $5 billion for 2015.
Not only that, in 2014 the company came up with its first dividend payment in many years, as well as a $1 billion stock buyback plan, which have boosted American Airlines’ stock price.
Another development that should cheer investors is the addition of the company to the S&P 500 stock index. This means that the stock will have to be bought by the legions of money managers that follow an indexing approach tied to the S&P 500. Their holdings will have to mirror the index, creating greater demand for the stock.
The Bottom Line
The merger of two major airlines creates a giant airline that is likely to be a big industry force, resulting in one less airline to choose from for consumers. American Airlines is working on many improvements that could help offset the impact of the reduced choice. The two airlines’ employee groups too have one less buyer for their services but they may be better off with new contracts under the combined management. And investors have something to cheer about since the market has bid up the company’s share price in anticipation of better days ahead for the company.