The original Eastern Air Lines shut down in 1991, but a group of investors is getting ready to bring back this historic airline name. While Eastern will remain a private company for now, it's worth examining for its potential impact on the aviation industry as a whole.
Rebirth of Eastern
Eastern Air Lines was originally founded in 1926 and grew to be one of the major airlines through most of the 20th century. But by the 1980s, the airline was running into trouble competing in the deregulated airline industry.
In the late 1980s, Eastern faced more problems stemming from activities by investors, higher fuel prices, high debt levels, and a labor strike. It filed for bankruptcy in 1989 and ceased flying in 1991.
Today's Eastern Air Lines is not a technical continuation of the original airline, but it does plan to share some similarities. For example, it will use the same livery colors, use the original Eastern's operations center, and have a Miami hub, like the original Eastern.
In December, Eastern held a ceremony to kick off the relaunching of Eastern Air Lines, and its recently delivered Boeing 737-800 received a water cannon salute.
Plan of operations
According to Business Insider, Eastern is expected to begin charter operations in March 2015 with scheduled service starting 12 months to 18 months later, following FAA approval. From there, Eastern plans to operate based around Miami, providing flights to Latin America and the Caribbean.
With a focus on Miami, Eastern could become a new source of competition for American Airlines Group (NASDAQ:AAL), which uses the airport as a major hub for its own Latin America and Caribbean operations. Eastern Air Lines president Edward Wegel has already set his sights on becoming the No. 2 carrier at Miami International within a decade.
Currently, American Airlines Group has about 75% of the Miami International Airport market share among U.S. airlines when measured by enplaned passengers, so taking the No. 1 spot would be much more difficult for Eastern.
However, Eastern could still cause problems for American by bringing additional capacity to the Miami market, potentially lowering load factors and/or fares. At the same time, Eastern is also likely to avoid directly competing with American Airlines when it doesn't have to since it's trying to turn a start-up airline profitable, and American could outlast it in a price war because of its larger network and access to capital.
It will also take at least a couple years from now before Eastern has taken delivery of all of its aircraft and is running a significant amount of scheduled service. Because of this, and Eastern's need to turn a profit, I see increased competition for American Airlines as a long-term issue rather than a near-term one.
Effects on other airlines
While Eastern Air Lines is growing in American Airlines' own backyard, other U.S. airlines don't need to be as concerned. First off, United Continental (NYSE:UAL), Delta Air Lines (NYSE:DAL), and Southwest Airlines (NYSE:LUV) have fairly small Miami market shares anyway, with Delta's being the largest at just over 12%.
Second, Eastern has discussed leaning toward Latin America and Caribbean flights rather than a heavy U.S. domestic presence. For a carrier with growth ambitions, this market strategy should prove advantageous, with the IATA forecasting 4.7% annual growth through 2034 from Latin America, but only 3.3% annual growth from North America.
Third, breaking into the high-demand slot restricted U.S. airports is difficult for upstart airlines, as major carriers have taken all of the available slots in many cases. This would keep Eastern out of many of the most valuable U.S. airports, only allowing it to target airports with less demand.
If Eastern Air Lines does strike gold with its Miami operations, it may make a larger move north later. But, for now, the strategy of focusing on Latin America and the Caribbean seems to work out best for both Eastern and the other U.S. carriers.
The bottom line
Eastern Air Lines is probably 12 to 18 months away from beginning scheduled passenger operations, but when it does, it will be moving into a major American Airlines hub.
Investors should keep an eye on where Eastern rolls out its flights and how closely it compete with existing carriers since tighter competition could put more pressure on fares and load factors at existing airlines. And, depending on the severity of Eastern's competition, it could reduce profits for existing airlines' Miami flights..
Alexander MacLennan owns shares of American Airlines Group and Delta Air Lines. Alexander MacLennan has the following options: long January 2017 $25 calls on American Airlines Group and long January 2016 $60 calls 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 may not 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.