Friday, August 16, 2013

Expert On American Airlines Merger

For those interested in the pending merger between US Airways (LCC) and American Airlines (AAMRQ), Minyanville has an interesting interview with analyst Wayne Plucker at consultant firm Frost & Sullivan. The best part of the interview is the he discusses a bigger impact to job losses and not costs to consumers. In fact, he makes the claims that ticket prices aren't high enough. Though some of those costs are being made up for with ancillary charges, the DOJ has it wrong about higher costs to consumers. Heck, in some cases consumers need to pay higher prices and that's just the hard cold facts that airlines undercharged in the past. If the new American Airlines were to dramatically raise rates for any routes and existing rates are so attractive, other airlines will swoop in to take market share.

After this consolidation, the industry is still left with Delta Air Lines (DAL) and United Airlines (UAL) as equal competitors and Southwest Airlines (LUV), JetBlue (JBLU), and Spirit Airlines (SAVE) amongst others as viable competitors. The industry would still be far from a monopoly or oligopoly, as claimed by the government. Naturally every route is dependent on the amount of airlines competing for that particular service, but so many viable options exist that any anti-competitive route would surly be targeted by the small competitors.

Another factor missed in all of this non-sense by the DOJ is the stability that this merger will provide for American coming out of bankruptcy along with a stronger airline for customers and more importantly employees. After a decade of mergers and cutbacks, the general employee base would be set going forward. If the government gets its way of lower fares, than the employees face scenarios where the companies will have to eventually cutback services. The market doesn't benefit from a service being offered below cost causing inefficiencies in the market.

Whether or not the government blocks this merger is yet to be seen, but blocking it due to trying to force US Airways to keep a non-competitive operations center open in Pittsburgh is a horrible reason.

Investors should load up on these as the desire to consolidate and focus on profitable growth will not change due to the government blocking a merger.


Disclosure: Long LCC. Please review the disclaimer page for more details. 



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