How American Airlines Is Soaring Into Its Merger

November was a month of transition for the U.S. airline industry. During the month, the Department of Justice finally settled its antitrust lawsuit with AMR and US Airways, allowing them to merge to become the new American Airlines (NASDAQ: AAL  ) . American has started posting strong revenue results recently, and appears ready to hit the ground running now that it has merged with US Airways.

In November, American Airlines posted by far the best unit revenue results in the industry for the second-straight month. Here's how it stacked up against competitors in the last full month before the merger with US Airways:

Airline

Unit Revenue Change

Capacity Change

American Airlines

Up 1.0%

Up 1.8%

Delta Air Lines (NYSE: DAL  )

Down 3.0%

Up 1.4%

Southwest Airlines (NYSE: LUV  )

Down 6.0%

Up 0.8%

United Continental (NYSE: UAL  )

Down 1.5%-2.5%

Up 3.0%

US Airways

Down 4.0%

Up 5.3%

Source: Airline press releases 

All in the timing
American Airlines was the only one of the five top U.S. carriers to report a unit revenue increase last month. In doing so, it overcame a strong calendar-related headwind. Since Thanksgiving fell on Nov. 28 this year, the Sunday and Monday following the holiday weekend moved into December.

These are two of the busiest -- and most lucrative -- travel days of the year, as many people are returning from their Thanksgiving trips then. This calendar shift weakened airlines' November results, with a corresponding benefit to December.

The airlines have been quick to reassure investors that they will offset the weak November with a very strong December. Delta projected a 7%-9% unit revenue gain for December, putting it on target for a 2%-3% gain for the combined November-December period. US Airways reiterated its forecast for the combined period, implying a roughly 2% total unit revenue gain. Lastly, Southwest is projecting a 2% unit revenue gain for the full fourth quarter.

American ends strong
By contrast, American Airlines didn't have to reassure investors with a December unit revenue forecast. For the second-consecutive month, it dominated the competition, exceeding the nearest competitor's gain by about three percentage points.

American's strong result implies that it is bringing a lot of momentum into its merger with US Airways. One of the key rationales for the merger was that with a broader network, the new American Airlines would be better able to compete for high-value corporate contracts. It appears that some customers may have already moved flying to American.

The company is also benefiting from its fleet renewal plan, which has allowed American to better match capacity to demand. This initiative will continue to provide unit revenue benefits for the next several years.

Foolish final thoughts
American's strong performance in the past two months is a harbinger of things to come. Now that its merger has been completed, American is likely to continue gaining corporate share, particularly at the expense of United Continental, with which it has significant route overlap. This is one of the key trends to watch for in the U.S. airline industry next year.

The longer-term success of the new American Airlines will depend on how smoothly the integration process goes. United Continental also enjoyed a "honeymoon" period in 2011, before its performance plummeted in 2012 and 2013. To make long-term investors happy, American will need to avoid similar integration mistakes.

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Comments from our Foolish Readers

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  • Report this Comment On December 10, 2013, at 8:08 PM, AcuraT wrote:

    I like how this article points out how well American is doing... but fails to point out that the company in charge in this reverse takeover is US Airways - and it did poorly in unit revenue change although I admit - they also had the biggest capacity increase (which drives down unit revenue in most cases).

    All I can say it is, it is a little early to be singing the praises of new American the first week of the merger. It will take a couple of years of hard integration work to make that happen. Just ask United Continental.

  • Report this Comment On December 11, 2013, at 11:36 AM, TMFGemHunter wrote:

    @AcuraT: I didn't mention this in the article, but US Airways and Southwest are more domestic focused and more leisure-focused. That means they probably took the biggest hit from the Thanksgiving calendar hit, but they will see the biggest benefit in December.

    More broadly, I agree that there's plenty of integration risk in the next few years.

    Adam

  • Report this Comment On December 11, 2013, at 5:08 PM, DVCAZ wrote:

    C.E.O. Doug Parker didn't become the creator of the popular regional airline America West that grew to take over U.S. Air by accident; he is one savvy hands on C.E.O.

    Bloomberg noted in a recent article, "American Airlines Seen Buoyed as CEO Dodges Merger Snags" how, over the two years leading up to the Monday, December 9th official merger, he and U.S. Airways worked hard to gain the support of American Airlines employees. Flight Attendants and Pilots, at one recent point, actually picketed together in favor of the merger and railing against the Department of Justices clumsy and failed attempt to block it.

    Parker learned a lot about winning over employees when Delta employees were so indignant at his failed attempt to merger with that airline. On the other hand, he had already shown a sensitivity towards employees who needed to know that they were recognized. His "Tribute Planes" that honored all the airlines the old U.S. Air had steamrolled over was very clever. I was at the unveiling in San Diego of the P.S.A. Tribute Plane and I can tell you how appreciative the former P.S.A. employees were. After U.S. Air took over P.S.A. with its "Our way or the highway" attitude employees would show their dissatisfaction by painting (late at night) the iconic P.S.A. smile on the noses of U.S. Air jets. The penalty was immediate dismissal. U.S. Air never gained the loyalty of the airlines it accumulated.

    The synergy, despite the requisite poker like nature of corporate negotiations towards a merger, between American's new C.E.O. Doug Parker and former A.A. C.E.O. Tom Horton was likely made considerably more civil by the fact that the two men actually had shared a cubicle at the American Airlines H.Q. in DFW.

    If you watched as Doug Parker, with Tom Horton at his side, surrounded by joyous American and U.S. Airways employees you could see that the pride was genuine and sincere.

    If the 2005 example of the America West/U.S. Air merger repeats itself that model will show that AAL can very easily catch up and pass the now #2 airline UAL's stock price in the upper $30.00+. On day one of the 2005 merger U.S. Air shares were at just $19.00 but in, and the industry, media and analysts took note, just thirty three days the stock was at $61.00 a share.

    The last two years leading up to this major merger have not been idle ones as both airlines have done all the right things, as the Bloomberg article (and many others) points out, to make the new American as stable and successful as it can be.

    Don't underestimate this airline. This was not your run of the mill merger. It may come to be the new model for how to to a merger the right way.

  • Report this Comment On December 11, 2013, at 5:15 PM, DVCAZ wrote:

    NOTE: "American's new C.E.O. Doug Parker and former A.A. C.E.O. Tom Horton was likely made considerably more civil by the fact that the two men actually had shared a cubicle at the American Airlines H.Q. in DFW." They shared their cubicle during the 1980's when they were both starting their careers in the airline industry. They were there when the former C.E.O. Robert Crandall was shaking up the industry. It really says good things about this deal that the infamously rough edged Crandall is enthusiastic about seeing "his" airline complete this merger - as noted in the Dallas Morning News article by the best aviation reporter Terry Maxon's article, "Former American Airlines boss Robert L. Crandall supports merger."

  • Report this Comment On December 11, 2013, at 7:51 PM, TMFGemHunter wrote:

    @DVCAZ: The Delta-Northwest merger IS the model for how to run a merger the right way. I mean no disrespect to Doug Parker, who is a very smart guy, but US Airways has never become fully integrated, and much of its profitability has been the result of its lower wage scales.

    As for the stock price, remember that AAL has almost twice as many shares as UAL on a fully diluted basis. AAL is already valued at a premium to UAL in terms of market cap. Also, the stock run following the 2005 merger was a much different situation. There's no way that AAL will triple from here; most of the run has already happened.

    Adam

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