Can This Megamerger Change the Airline Industry?

So bankrupt AMR (OTC: AAMRQ.PK) and once-bankrupt US Airways (NYSE: 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.

Operation!
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?

Dogfights
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 (Nasdaq: JBLU  ) and Southwest's (NYSE: 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.

Maybe you're uncomfortable trying to pick the least downtrodden company out of a basket of bad airlines. That's understandable. Instead, check out an industry disruptor that could really take off: Download your copy of "The Next Trillion-Dollar Revolution."

Fool contributor Michael Lewis owns no shares of the aforementioned stocks. Motley Fool newsletter services have recommended buying shares of Southwest Airlines. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On April 23, 2012, at 5:57 PM, Listeningtofools wrote:

    I work for the airline industry. I am very curious to see if you can you explain to me why your online site is the only one talking about US Airways and American Airlines as if it were the great airline merger apocalypse? To me is looks very suspicious and troubling the way you guys seem to be out on a limb all by yourselves saying that the merger would be disastrous event for both airlines. Your past track record on how American Airlines was fairing was completely wrong. You were wrong about the bankruptcy when you said that American Airlines had enough money in the bank to burn for the next two years so you asked why would they go bankrupt? You weren't paying attention to the real details. And you still are paying attention to the details and that is why you will get it wrong again.

  • Report this Comment On April 23, 2012, at 6:26 PM, XMFMadMardigan wrote:

    @Listeningtofools,

    Your feedback is much appreciated and without doubt adds to the value of our site.

    Here at the Fool, we not only accept, but encourage opinions from all across the board. As with any and all investors, we are not always correct. However, we conduct the research to back up our theses and are committed to providing high-quality analysis to our readers.

    I would love to hear your opinion on the AMR-US Air merger as an industry insider.

    As far as 'suspicious' goes...not quite sure what you may mean. But if you accuse us of going out on a limb to voice contrarian views---guilty as charged. I, for one, would love to be the contrarian voice to Wall Street's opinions.

    Is this a merger apocalypse? No. If I thought it was, I probably would have titled the article 'Merger Apocalypse' as that has a great ring to it.

    Feel free to comment and explain your take on the subject. I honestly believe it will only enhance the article by bringing in a different point of view.

  • Report this Comment On April 23, 2012, at 8:41 PM, practicewhatu wrote:

    I don't see a conspiracy here, but I do question the analysis. And, I have no dog in this fight.

    USAirways (at least it has been for the past few years) has better on-time performance in part because Phoenix has great weather. And, for the most part, so does Charlotte. If you look at AMR's on-time performance, how many of the routes cited are from JFK, LGA, or ORD? All of those are historically poor for on-time performance for ALL carriers, not just AMR. So, before we judge, at least let's look at the stats. It might be helpful to gauge vs. United at EWR and ORD, for example.

    Second, I was not certain what to make of this comment: "But although the APA technically represents the pilots, there appears to be some dissidence between the two parties." AMR's management appoints the Chief Pilot. So, to hear him talk publicly about a "leaked" letter, albeit one that he probably leaked himself, in which this deal is criticized...well, that makes perfect sense that the pilots would disagree with him. AMR and its pilots have been at odds for years.

    Last, the "route overlap" issue is different than described here. USAirways has almost zero presence in the upper midwest. American is strong. USAirways has a limited presence to Latin America, whereas American is very strong through Dallas and Miami. AMR still has good traffic across the North Atlantic...USAirways has some, but not much. By contrast, USAirways has a southeastern US hub, and AMR has almost no presence in the north-south East Coast. Plus, the Shuttle still has some value. Sure, Asia needs up-grading, but let's not forget that American has partnerships with Japan Airlines (ok, not the best...) and with Cathay Pacific (ok, perhaps one of the best...). And, a partnership to Australia.

    Plus, they have the deals with the newly combined Iberia / BA. Not an awful combination over the long-term...

    So, the route issue may be better than it sounds.

    Lastly, let's consider that in this business, employees can shut down a company and destroy it. Having employees on your side can matter. And, it's unlikely that AMR management will be able to do that. By contrast, the principle USAirways fight is AMONG the pilots, and my bet is that if the AMR pilots endorse a deal, then they will have WAY, WAY more votes on the next contract than the crotchety USAirways East pilots who have not yet been interested in coming to an agreement.

  • Report this Comment On April 24, 2012, at 6:14 AM, Listeningtofools wrote:

    One important detail in this whole argument with regards to the merger is the incompetence displayed by AMR’s management by failing at the job they were employed to do which is to make and keep AMR profitable. The morale among American Airlines employees is very low. They have been negotiating with AMR for several years and have not reached any agreement. The employees for American Airlines are angry at management and have expressed no confidence in them as to their plan for navigating American Airlines back into profitability. I think the best rationalization of why the merger between American Airlines and Us Airways would work was expressed by the APA in a Question and Answer about the Merger on the dallasnews.com. They analyzed every aspect of the merger and thought that it was the best way for American Airlines to survive and compete with United and Delta Airlines. I think their analysis is correct. So much so that Delta Airlines seeing a possible threat to its current position attempted to throw a monkey wrench into the speculation of a merger between American Airlines and US Airways by saying that they wanted to buy either American Airlines or US Airways also. I do not think Delta wants to fall into the current third position which is occupied by American Airlines. The size of a network does count for a lot in the airline industry anyone saying the opposite is completely delusional.

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