This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Despite Euphoria, American Airlines Faces Some Harsh Realities

Stocks in this article: AAL DAL UAL

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?

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,
click here.

Follow @tedreednc

2 of 2

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 18,030.21 +6.04 0.03%
S&P 500 2,081.88 -0.29 -0.01%
NASDAQ 4,773.4720 +8.0480 0.17%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs