Can This Megamerger Change the Airline Industry?
So bankrupt AMR (OTC: AAMRQ.PK) and once-bankrupt US Airways (NYS: LCC) want to join hands and fly together. Both US Air and AMR management have been very public about the possibility of consolidation over the past few weeks. The move would consolidate assets and routes, create operational efficiencies, and slim down Kayak search results to something more manageable. It may look good on paper, but can either company really help each other?
Two airlines, one desire
It sounds like a great date movie: Against impossible odds, two companies come together to try to make it in an industry that has been one of the greatest money holes of all time.
But even if it makes for great CNBC squawking, the merger may not be in the best interest of either company. American Airlines' underperformance in the past few years comes at a time when US Airways has gained a strong foothold in the eastern half of the country. Besides stretching that foothold across the Midwest and further west, why would US Air want to acquire a potential disaster? Globally, the overlap in routes, as noted in Scott McCartney's April 20 Wall Street Journal article, would not make for the best marriage. US Air would still be underrepresented in Asia compared with Delta and United. Domestic operational efficiencies might improve, but I don't see much else in it for US Air.
American Airlines has some of the worst statistics when it comes to delays and cancellations. Of its top 20 most traveled routes in 2012, only one has been on time above 89% of the time -- and that was a flight from Dallas to Austin. Using the same metrics for US Air, eight out of 20 of were 90% or above.
On the lost- or damaged-luggage front, the US Department of Transportation ranks US Air fourth out of 15 airlines reviewed, with an average of 1.85 complaints per 1,000 travelers. American Airlines came in at No. 9, with an average of 2.62 complaints.
So if US Air takes over, it will have to retrain its new employees and reorganize American Airlines' crummy systems just to maintain what it already has.
Why, US Air, why?
What will US Air do when it inherits 10,000 pilots from American? Are the more senior pilots going to have to duke it out with US Air's top guns for the best routes? US Air is still working out the kinks from the merger with America West, whose pilots, baggage handlers, and flight attendants are not going silently into the night. In one incident, the merger included physical brawling that sent two men to the emergency room, in possibly the best example of culture clash I've ever heard of.
The Allied Pilots Association, American Airlines' pilots union, has recently thrown its weight behind the merger after US Air promised all pilots an immediate 5.5% raise, with annual raises for five years after. But although the APA technically represents the pilots, there appears to be some dissidence between the two parties. When American Airlines chief pilot John Hale spoke out against the merger, the APA responded, "Our take is for whatever reason, American Airlines management feels threatened by US Airways management." Astute observation, APA.
Sit near the exit
This potential merger will go through several iterations before we see what will actually happen. US Air and American will have to negotiate endlessly between themselves and among the unions. It will cost a lot and accomplish little, and I'm not sure either will company emerge in a better condition. Moreover, the airline industry, as noted in McCartney's article, will naturally consolidate over time -- as it did in Europe.
The major carriers, like US Air, will have the most routes and economies of scale. The discount airlines, such as Jet Blue (NAS: JBLU) and Southwest's (NYS: LUV) Air Tran, will be the niche players filling in the gaps and taking advantage of an inefficient system. In my opinion, if any of these airlines is a worthy investment, it's probably one of the latter carriers. Remember that study from the Department of Transportation? Jet Blue and Air Tran were No. 2 and No. 3 -- just beneath rising superstar Virgin America.
US Air made a strong comeback from its bankruptcy in the last decade. In a brutal business, it seemed to find a formula that worked, for the most part. After all the effort and struggle to make this mega-airline fly, it seems unnecessary to take a flightless bird under its wing.
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At the time this article was published Fool contributorMichael Lewisowns no shares of the aforementioned stocks.Motley Fool newsletter serviceshave recommended buying shares of Southwest Airlines. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.
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