Submitted by George Putnam, III as part of our contributors program.
One of the top stories in the bankruptcy and turnaround investing world over the past few weeks has been the merger of US Airways (LCC) with AMR Corp. (AAMRQ) (the parent of American Airlines). Most of the press coverage has discussed the effect on the two airlines that are merging. We believe that, in the short run at least, the principal beneficiaries of the merger may be their competitors, particularly Delta (DAL) and United (UAL).
When large airlines merge, the integration of the two carriers usually proves much more difficult than anticipated. We saw this several years ago when US Air merged with America West and again more recently when United and Continental came together. Each airline has many key components–such as aircraft fleets, reservation systems, union contracts and myriad other things–and integrating these disparate components can cause headaches for the merger partners. For example, a large percentage of United Continental’s flights were grounded one day a few months ago when glitches appeared after the company tried to integrate the two legacy computer systems.
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We expect that for at least the next several years, the costs of the USAir-AMR merger will be greater, and the synergies will be less, than the managements expect. Moreover, there could be significant snafus that will drive away customers, sending them to competitors.
These possible snafus are not the only potential benefits for the other airlines. They will also benefit from the reduced competition in the industry, as the number of major carriers is reduced by one.
For these reasons, we suggest that investors may want to focus more on the stocks of Delta and United Continental (both of which are on my recommended purchase list) than on US Air or AMR. At worst, Delta and United will get a small boost from industry consolidation. At best, they might get a big boost if integration problems at USAir-AMR drive customers away from the merged carrier to other airlines.
Disclosure: The author is long UAL and DAL