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Despite Euphoria, American Airlines Faces Some Harsh Realities

Chicago is home to United. United remains a flawed airline and many say its last great CEO was Stephen Wolf, who left 20 years ago, and it is also true that the merger makes American the biggest carrier at Chicago O'Hare. But the America West team has never shared a hub with another legacy airline.

The team battled Southwest in Phoenix and held it to a draw, but Southwest competed on price, not on domestic or global connections. Is it possible that American is still competing with Southwest, adding seats to three aircraft types? Is that what corporate fliers want? At O'Hare, "there is going to be hard-fought, hammer and tongs battles for corporate contracts," said aviation consultant Bob Mann. "It will be fought contract by contract."

Los Angeles, which President Scott Kirby has said will eventually be American's gateway to Asia, is among the toughest operating environments in the U.S. Airport fees are high. All three majors compete. They cannot build big enough hubs, and on international routes they compete with foreign carriers who gather traffic in their home countries.

Delta has decided to build its Asia hub in Seattle, which lacks originating passengers but has just one competitor. Little Alaska (ALK) is fighting the good fight, but from Delta's point of view who would you rather compete with, Alaska Airlines or the entire world?

Must Read: Boeing CEO Sees Labor Peace but Union Says Not So Fast

Another concern is that the cost of the merger included divesting slots at Washington National, most of which were claimed on Thursday by JetBlue (JBLU) and Southwest. JetBlue will add 12 daily DCA departures while Southwest will add 27. They will very possibly bring fares down, reducing profits at what has long been US Airways' most profitable operation. Nearly all of the American slots at DCA went to competitors who may well charge less to key destinations. 

Mann said the biggest worry should be that the ongoing gradual economic expansion will cease, possibly as a result of an exogenous event. "Geopolitical events are the ones you can't plan for or effectively hedge or diversify from," he said. "All you need is one geopolitical event to screw things up." Higher oil prices are just one possibility.

Additionally, Mann said, "There are the usual integration challenges and execution risk. Delta and United aren't going to stand there and let their No. 1 and No. 2 network ranks be eroded. Also, we will have to see how long the honeymoon with labor lasts. Right now, I think labor shares the euphoria, but that can be short-lived."

Euphoria is nothing new for the America West team. In May 2006, eight months after the US Airways takeover, JPMorgan analyst Jamie Baker famously predicted that shares would double to $100.  

The shares got as high as $63.27 in November 2006, then fell back to the $2 range in mid-2009. Shares stood at $22.55 when seven years of trading in post-bankruptcy US Airways ceased in December.

Written by Ted Reed in Charlotte, N.C.

To contact this writer,
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Follow @tedreednc

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