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While understanding that the recently announced merger between US Airways (NYSE: LCC ) and American Airlines (UNKNOWN: AAMRQ.DL ) is obviously very important for shareholders of those two companies, it will also have a significant impact on competitors. On one hand, consolidation is expected to improve pricing power for the airline industry, which should benefit competitors. On the other hand, combining the American Airlines and US Airways networks will create a stronger carrier that could potentially take market share away from competitors. So who stands to gain or lose the most? Let's take a look.
1. United Continental (NYSE: UAL )
United Continental is likely to be the biggest loser. In a message to employees, CEO Jeff Smisek tried to put a positive spin on matters by focusing on the benefits of consolidation. However, as part of the merger, US Airways is moving from United's Star Alliance to American's Oneworld global alliance. The merger presentation on Thursday pointed out that whereas Star Alliance has a 45% share of U.S. international capacity today (versus 30% for SkyTeam and 26% for Oneworld), Star's share will drop to 36% while Oneworld improves to 34% after the merger.
United still has the broadest international network of any U.S. carrier. But it has benefited in recent years from the additional scale provided by being part of the dominant global alliance. United's current code-share arrangement with US Airways gives travelers additional itinerary options and opens up a few destinations served by US Airways but not United Continental. Today, American Airlines has one offsetting advantage, which is its trans-Atlantic joint venture with British Airways. This partnership gives American a strong position at London's Heathrow Airport, which is the top market for international business travel from the United States. After the merger, Oneworld will maintain its advantage in London while overcoming its previous size disadvantage.
United will also see a particularly large impact from the merger because it has significant route overlap with American. The two have competing hubs in the New York, Chicago, and Los Angeles markets. Because of the strategic value of those cities, the three largest in the U.S., the post-merger American Airlines is likely to fight hard to maintain or improve its position in those markets. Thus, the effects of stronger competition from American are likely to outweigh any benefits from consolidation for United.
2. Delta Air Lines (NYSE: DAL )
Delta is likely to see a more limited impact from the merger. Delta also competes in the New York and Los Angeles markets and has been working particularly hard to gain share in New York. American's East Coast strategy will have a major impact on whether Delta benefits from the merger. US Airways has a major hub and European gateway in Philadelphia, less than 100 miles from American's European gateway at JFK. If the combined carrier focuses on growing the larger Philadelphia hub, then Delta will be able to bolster its position in New York.
However, the strategic importance of New York makes it more likely that American will keep trying to expand its presence at JFK, even though capacity is constrained by the lack of available slots there. While a resurgent American Airlines could crimp Delta's plans to gain market share in New York, Delta will be improving its own position at the same time, through a recently announced joint venture with Virgin Atlantic. That airline is the second largest carrier at Heathrow (albeit a distant second), and this partnership will vastly expand Delta's access to that critical market. Benefits from this new joint venture should more than offset any uptick in competition from American.
3. Low-cost carriers
Companies such as Southwest Airlines (NYSE: LUV ) and JetBlue Airways (NASDAQ: JBLU ) are likely to see the biggest benefit from the merger. As the three network carriers (American, United, and Delta) focus on gaining high-value international business travelers, Southwest and JetBlue will probably have opportunities to grow domestically. Southwest is best positioned to take advantage of any capacity rationalization that eventually takes place following the merger, because of its larger size and nationwide footprint.
For example, the US Airways hub in Phoenix lies between American's hubs in Dallas/Fort Worth and Los Angeles. With the latter two being larger and more important business markets, Phoenix could eventually see some service cuts. Phoenix is already the fourth largest focus city in Southwest's network, with 173 daily departures to 47 cities. If American downsizes there, Southwest would gladly take up the slack.
For JetBlue, the biggest upside comes from the strategic value of its hub at JFK Airport in New York. JetBlue has had an interline agreement with American Airlines since 2010, which allows customers to connect between American and JetBlue at JFK (and also in Boston). If American chooses to grow its European gateway at JFK, slot constraints will force it to rely even more heavily on JetBlue to generate connecting traffic. In other words, as American shifts JFK capacity toward international flights, JetBlue could see a corresponding increase in traffic on its domestic flights at JFK.
Thus, low-cost carriers such as Southwest and JetBlue are likely to be the biggest beneficiaries of the most recent round of airline consolidation. For Delta, and particularly for United, having two weaker competitors combine into one strong one is more likely to hurt than to help.
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