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CHEAT SHEET Analysis: How will the airline industry’s trend toward consolidation help American Airlines?
One of the core components of our CHEAT SHEET Investing Framework explains that companies riding macro trends tend to outperform those that don’t. Think of the investing proverb, “A rising tide raises all boats.”
So far, American has been left behind by the current trend in the airline industry; the consolidation of the so-called legacy airlines is nearly at an end. In recent years, Delta (NYSE:DAL) has joined with Northwest and United with Continental, leaving American and US Airways the fourth and fifth largest airlines in terms of passengers, respectively. As a result of its position, American has felt the strains of competition; AMR filed for bankruptcy in November 2011 because of its carrier’s uncompetitive costs.
However, if the merger between American Airlines and US Airways is completed, it will be the largest in airline history, and the resulting carrier will be worth approximately $8.33 billion, an amount large enough to compete with United Continental (NYSE:UAL) and Delta.
Consolidation has been good for the industry, according to a report in NPR’s Morning Edition broadcast on Friday. While domestic fares have increased by approximately 5 percent this year, and they are expected to increase by another 5 percent in 2013, airline consolidation is not the cause. Rather fuel surcharges and taxes are largely to blame. Instead of contributing to rising fares, the decreasing amount of competition in the industry has enabled carriers to expand their fleets with newer, higher-quality aircraft, which could lead to better customer service. As NPR’s Wendy Kaufman stated in the report, airlines consistently rank at the bottom of customer service satisfaction rankings.
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