The world’s largest airline takes wing

The US$11 billion merger of American Airlines and US Airways has created the world’s largest airline, with the new airline retaining the American Airlines name.

AMR Corporation, the former parent of American, recently came out of two years of bankruptcy protection, and has been replaced by the new American Airlines Group Inc. (NASDAQ: AAL). American struggled through a decade of large losses, falling behind United and Delta in size.

It’s the latest in a series of mergers in the US that will leave just four airlines controlling more than 80% of the US air-travel market. It also means less competition has seen prices boosted, and the airlines will be hoping, a return to profitability.

But the new entity faces massive challenges. News reports estimate it will take two years to combine the two companies’ operations, and airline mergers are notoriously wracked by issues. Computer network problems plagued United and Continental’s merger, leading to system outages and flight delays. Then there are the issues with unions representing the labour force. US Airways still hasn’t fully integrated its pilot crews since its merger with American West, 8 years ago.

The combined airline will boast more than 1,000 aircraft; fly close to 6,700 flights each day to 330 destinations in 54 countries and transport an estimated 190 million passengers each year. With project revenues of US$40 billion, shareholders in the new airline will be hoping to see some of that in the form of profit, but I wouldn’t bet on it.

Airlines are inherently bad businesses, just look at the performance of Qantas Airways (ASX: QAN) and Virgin Australia Holdings (ASX: VAH) locally. While in the US, several airlines have gone bankrupt more than once.

Foolish takeaway

The merger could see the all of big four airlines in the US become profitable again. With less competition, they should have the ability to raise prices and generate decent returns for shareholders. That is, until one of them decides it wants a greater share of the market, and drops its prices. With the others forced to follow suit that will likely hurt all of them.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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