Now the Tough Part Begins for American Airlines Group

As these two airlines become one giant carrier, integrating operations for maximum profit is key to shareholder returns.

May 13, 2014 at 10:40AM

When it comes to mergers, crafting the deal is only half the battle. When one multibillion-dollar company buys another, proper integration is key to generating the biggest cost savings and revenue enhancements. For 2014, American Airlines Group (NASDAQ:AAL)offers one of the biggest plays on merger integration with major upside if the airline is successful and potential problems for investors if things get off track.

Airline merger
The airline industry has traditionally been one high on competition and low on margins. But through a series of mergers completed over the past several years, the number of major carriers has been greatly reduced.

The latest merger comes from the combination of US Airways and American Airlines' parent company, AMR. As American Airlines Group, the new carrier will be the largest in the world with "nearly 6,700 daily flights to more than 330 destinations in more than 50 countries and more than 100,000 employees worldwide."

In fact, this merger was under threat last year by the Department of Justice over concerns that the new American Airlines Group would have too much market power. In November, a settlement was reached allowing the merger to proceed, with the condition that American Airlines Group divest some slots at key airports.

Nonetheless, the new carrier's network remains strong and leaves many options for optimizing operations. So far, US Airways has joined American Airlines in the OneWorld alliance so the carriers can operate a codeshare whereby the airlines can book passengers on each other's flights. The carriers have also started reciprocity of elite benefits and usage of airline clubs, providing more options to high-revenue business travelers.

Over the next several months, look for integration progress to continue as airport operations are moved closer to each other and more aircraft are painted in the American Airlines colors. Within the next couple of years, American Airlines Group hopes to obtain a single operating certificate, which will officially make US Airways and American Airlines one airline.

Investors should watch progress on integration closely, as it will prove key to American Airlines Group's near-term earnings. A rougher integration at United Continental Holdings (NYSE:UAL) led to everything from reservation system issues to excessive operating costs. Everything from route alignment to labor issues will be under watch at American Airlines Group as the company tries to form the world's largest airline. But, trading at only 6.2 times forward earnings, American Airlines Group has a lot of upside potential if it can execute its integration plans while boosting revenue and controlling costs.

Now for the tough part
Hammering out a merger deal is one thing, but integrating companies to extract maximum profit is another challenge. American Airlines Group is trying to build another giant airline that will challenge its rivals who were themselves formed by mergers. Over the next couple of years, investors should watch integration progress closely to see if this merger can live up to expectations.

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Alexander MacLennan owns shares of American Airlines Group. He also has options on American Airlines Group. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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