August was a big month for the airline industry. Within the last full month of summer, fines have been given, passenger compensation rules changed, and an airline mega merger thrown into question. Let’s discuss what happened, why, and what it means for travelers and investors.
Airlines are not known for good service, and the latest government action against United Continental Holdings Inc (NYSE:UAL) further highlights this view. The Los Angeles Times reports that the Department of Transportation has fined the world’s largest airline $350,000 for delaying refunds for more than 9,000 passengers. The Times also noted UAL’s filing of inaccurate data for lost luggage and problems overbooking flights.
What it means: While having to pay $350,000 is not exactly a day-brightener, United Continental Holdings Inc (NYSE:UAL)’s fine is not uncommon in the airline industry. All other major carriers have been similarly fined at some point for various other company issues. Furthermore, this fine comes in the wake of United and Continental integrating their reservation systems. It’s unclear how much of the delays were due to this, but as the airline moves beyond this stage, investors should expect simple disorganization to decrease. If UAL is focused on reducing fines and providing better service, these incidents should be fewer in the future once system integration is complete.
What it means: Although this is a sharp increase in compensation compared to Air Canada’s old policy, the change puts Air Canada more in line with U.S. airlines, which have managed these requirements well. Thus, it’s unlikely that this change will have a significant effect on Air Canada’s bottom line.
The whole story has nonetheless brought to light airlines’ poor service reputations, and given rival WestJet Airlines a chance to chime in with its own policy of only bumping passengers when a smaller aircraft needs to be used. However, this story will disappear from public view over time — especially when the biggest industry news is still developing.
Surprise merger threat
The merger between US Airways Group, Inc. (NYSE:LCC) and American Airlines parent company AMR Corporation (OTCMKTS:AAMRQ) was set to create the world’s largest airline, and complete an industry consolidation trend that began with the Delta-Northwest merger in 2008 and continued with the United-Continental merger in 2010. However, the road for this merger got tougher after the Department of Justice sued to block it in August. Shares of all major airlines dropped, with shares of US Airways and AMR Corp hurt the most.
What it means: This is by far the biggest airline industry news of August — news so big that major news networks were even featuring the story. Despite much of the news reporting the merger is now dead, its prospects are not entirely bleak. The lawsuit still is heading to court, and both airlines have vowed to vigorously defend it. The airlines won their request for a November trial date, and both the airlines and the DOJ have not ruled out a settlement.
If, by filing the lawsuit, the DOJ was looking to gain additional leverage in negotiations, then the prospects for a settlement resulting in a merger are still strong. Unlike the other August airline news, this merger battle will remain at the top of industry news for the coming months. After all, it matters to all members of the industry, and it will make or break shares of AMR.
August in review
Industry news will be dominated by coverage of the merger battle for at least the next few months — but airline investors should not ignore smaller, overshadowed news because of it. When a final decision comes in the merger case, it will be the biggest industry news in years. And based on how the market reacted to the DOJ lawsuit, share prices will reflect the enormity of the decision.
Alexander MacLennanowns shares of Air Canada, American Airlines, Delta Air Lines, and Gol Linhas. He is also long the following options: $22 JAN 2015 Delta calls, $25 JAN 2015 Delta calls, $30 JAN 2015 Delta calls, $17 JAN 2015 US Airways calls. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool has no position in any of the stocks mentioned.
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