American Airlines, US Airways Merger and What Can Be Learned From 4 Other Mergers

Feb. 14, 2013 — -- intro:While a merger between US Airways and bankrupt American Airlines would be good for shareholders, it is likely to cause headaches for consumers and their wallets.

In the long term, Rick Seaney, CEO of FareCompare, said after legacy airline mergers, customers usually see cuts in capacity, which give airlines more pricing power.

"I think prices will go up. When legacy carriers merge, there's one less airline in the competitive mix plus we generally see more capacity cuts - both of which give airlines more pricing power," Seaney said.

Read more: What the US Airways and American Airlines Merger Means for Travelers

But before customers blame airlines for higher costs, Jeff Kauffman, managing director of transportation equity research at Sterne Agee, said fares are to a large extent out of carriers' hands.

"Most of the increase in airline prices have been higher fuel prices or government taxes and fees post 9/11. Those have been drivers of higher ticket prices for consumers," Kauffman said.

Consolidation in the airline industry is not new, and airlines have come a long way since deregulation in the 1980s, according to Kauffman.

Though many travelers may feel like airline travel is more frenzied than in the past, with more fees and crowded planes, Kauffman said airlines are still learning how to become more efficient transportation service providers.

"Carriers are starting to make money," he said, which are allowing airlines to offer more amenities -- although often for a fee -- like personal movie screens, better snacks and wi-fi.

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"We harken for days with half empty planes with no one next to you, but airlines couldn't suvive with that," Kauffman said.

Amongst the "rubble" over the years, the remaining major networks in the U.S. are striving to improve customer service.

On Tuesday, in fact, the Transportation Department reported that the nation's largest carriers reported their lowest rate of mishandled baggage for a year during 2012. The 15 carriers reported a rate of 3.09 reports of mishandled baggage per 1,000 passengers, an improvement compared to 3.35 in 2011. It was the lowest rate of mishandled baggage since this data was first reported in September 1987.

"It's improving and I think in the next couple years you're going to see improvements, because airlines that are left are investing meaningfully in improving the customer experience," Kauffman said. "It may be too early to see this, but if you step back and see this on an evolutionary basis, it's a more interesting scenario."

Here is a look at five airline mergers and what the industry learned -- and is still learning -- from them:

quicklist:title: American Airlines and US Airwayscategory: Recently announcedmedia: 18478248text:

Kauffman said the merger between American Airlines and US Airways brings together a large carrier and a niche carrier, respectively.

"The challenge in the airline industry is you have to be small enough to hammer out a niche or large enough to compete on a global scale," he said. "American is too large to be in a niche and too small for global scale."

There is pressure to announce a merger this week before AMR Corporation's bondholders' confidentiality agreement expires, thus allowing public access to the merger's financial information.

Basili Alukoks, an airlines industry analyst for investment firm Morningstar, said investors holding bonds of bankrupt AMR Corporation "would maximize the reorganization value through a merger with US Airways," and if the two companies combined they would generate annual revenue of $1.5 billion.

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quicklist:title: Southwest Airlines and AirTrancategory: Estimated merger completion 2014media: 18478224text:

Kauffman said the merger between Southwest and AirTran, announced in May 2011, was a "good idea on paper" between two very different airlines. While Southwest had a consistent schedule for its flights, AirTran was a discount airline that had exercised a flexible capacity according to demand.

The merger has taken "a little longer than anticipated" as a new reservation system was developed.

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Last month, Southwest Airlines Co. announced higher than expected fourth quarter profits, though net income fell 49 percent to $78 million from the same quarter a year ago.

quicklist:title: United Airlines and Continental Airlines category: 2010 media: 18478166text:

Of all the mergers in this list, Kauffman said that between United and Continental, announced in May 2010, was the most "disappointing" because it has taken longer to integrate the two firms.

"This was the most disappointing so far in achieving what they wanted to achieve on a timely basis, largely related to the SAP issues," Kauffman said, referring to the company's technical database.

As a result, there were "massive flight delays, crews scheduled incorrectly, booking system closing high fare buckets too early, and problems with their frequent flyer system," he said.

"It was mostly technological but enough to mess things up pretty bad. They're getting their arms around it and are getting it fixed today," he said.

This year, United Continental Holdings became the first U.S.-based international carrier to offer satellite-based wi-fi on long-haul overseas routes, the company said. The airline also said it offers more live television access than any other airline in the world, with DIRECTV on nearly 200 aircraft.

quicklist:title: Northwest Airlines and Delta Air Linescategory: 2008 media: 18478116text:

Kauffman called this a merger out of necessity, which closed within the same year it was announced.

"The carriers were both struggling at the time," Kauffman said of their financials.

Delta offered its "viable" transatlantic business network, while Northwest had a popular hub in Atlanta.

"This probably ran among the smoother mergers, in terms of integration," he said.

Last month, Delta Air Lines, based in Atlanta, announced net profit of $7 million in its fourth quarter, down from $425 million a year ago, and cited higher fuel, labor costs, and negative effects to operations due to Superstorm Sandy.

quicklist:title: US Airways and America Westcategory: 2005media: 18478126text:

About a year after US Airways filed for Chapter 11 bankruptcy in 2004, it merged with America West Airlines.

Despite some labor groups having issues with their contracts, Kauffman said, "US Airways is stronger today than either of the two carriers individually were pre-merger."

"It took a little while but they managed to carve a niche for themselves and are generating profits for themselves," Kauffman said.

Late last month, US Airways Group Inc. said it doubled its net income in the fourth quarter to $18 million compared to a year ago.