Today, US Airways Group Inc. (NYSE: LCC) and AMR Corp. (PINK: AAMRQ), the parent of American Airlines, announced the approval of their merger.
AMR Corp. filed for bankruptcy protection in 2011. The company had been losing money for years, and it decided then that it was time to restructure. US Airways showed interest in a merger, but AMR CEO Tom Horton criticized the airline’s advances.
Now, more than a year later, his company has given in. And Horton is handling it well, telling the Wall Street Journal, “I think we’ll work well together,” in reference to the relationship between him and US Airways CEO Doug Parker.
The two had been friends for years, working together at American Airlines. When the merger takes place, Parker will become chairman and Horton will stay on temporarily as non-executive chairman, stepping down in 2014.
The new airline will be worth an estimated $11 billion and will be one of the largest in the world. It is expected to be enough to repay AMR’s creditors while also allowing current shareholders to obtain the remaining 3.5% stake. Shareholders of US Airways will control 28% of the company.
Though Mr. Parker will become CEO, the company will retain the American Airlines brand – one that is much better known globally. The companies expect to save $1 billion a year by 2015 and bring in an annual $40 billion in revenue.
Now there will be just four major airlines to rule the global skies: United Continental (NYSE: UAL), Delta Air Lines (NYSE: DAL), Southwest (NYSE: LUV), and of course the newly-merged company.
This, of course, will limit options for passengers even more than ever before. And when choices are limited, prices go up. Passengers simply can’t avoid paying more.
CNNMoney found that, since 2004, airline fees have only gone up 2%. But now the price of oil is also rising, and these four companies are about to control 80% of passengers on U.S. airlines. There’s less competition than ever before – and fewer choices for one-way trips.
Between American Airlines and US Airways, just thirteen locations had nonstop flights, eight of which were shared and will consolidate into one airline. As there are fewer options for flights, seats will become more competitive, pushing prices up.
And then there’s the price of oil. It’s been bouncing close to $100 a barrel, and this year as global demand goes up to higher than it’s ever been and OPEC production goes down slightly, you can guarantee it will break that barrier soon.
Jet fuel prices rely on oil prices, and airline ticket prices rely on jet fuel prices. As John Heimlich, the chief economist at Airlines for America, told CNNMoney:
“Air travel is a commodity. The market still disciplines pricing.”
Of course, he was referring specifically to customer demand. But that’s only part of it. Oil prices have a large hand as well.
Our analysts have traveled the world over, dedicated to finding the best and most profitable investments in the global energy markets. All you have to do to join our Energy and Capital investment community is sign up for the daily newsletter below.
At Energy and Capital, we caught onto this trend in airline prices years ago. It was 2008 when we told you about closing and consolidating airlines due to fuel prices, and how growing crude prices would continue to damage this industry.
We even warned you about American Airlines:
The bigger carriers with deeper pockets (and more unsold seats) have kept prices relatively low while burning through cash reserves as their own fuel costs mounted. American Airlines is now losing about $3.3 million a day, and at the current rate, could burn through its $5 billion in cash reserves in as little as four years. And it has the biggest cash reserve in the industry.
And here we are, at a point where American Airlines’ losses forced it to make a decision. Fortunately for the company, it will likely be able to repay its creditors – something that doesn’t often happen. And as it becomes one of the four major airlines, it’s safe for now.
But the price you pay for a flight will not be so lucky. These four will control the pricing, and though smaller carriers may come in to try to cover where these airlines are lagging, they too will struggle to keep up with oil prices.
So book your upcoming flights while you can…before deals on flights are part of the past.
That’s all for now,
Brianna Panzica
@brianna_panzica on TwitterEnergy & Capital’s modern energy guru, Brianna digs deep into the industry with accurate and insightful updates into the biggest energy companies and events. She stays up to date with the latest market moves and industry finds, bringing readers a unique view of current energy trends.
