I was surprised US Airways was allowed to swallow American. So many shenanigans went on during that bankruptcy. 35x on the common coming out of bankruptcy ain’t bad either. I actually had a small short on with a tight stop, thankfully. Good lesson.
http://finance.yahoo.com/news/delta-disaster-time-break-big-091500095.html
AMR structured that deal brilliantly, made out like bandits for their shareholders. Fund I was involved with held some of their notes along with common and made a ton on both.
^Everybody made out, but what was amazing was that there was a possibility for the common to get something, 3%, even if the bond holders had not been made whole by an improving airline market. And the common ended up with far more than 3% because of the waterfall over a certain average stock price so many days after exit. US Airways gave away the barn for control it appeared to me. But when things work out, the risk gets washed away. Run a monte carlo on that deal. There were possibilities that weren’t so rosy. Oh, and of course the American Pilot’s pension got a huge chunk of the new entity as well. Anti-trust concerns were brushed over. The challenge was a joke. Open-jaw routes weren’t even considered as competing.
I don’t cover airlines, but I thought the major carriers are crippled because unions are too large. can’t compete with nimble non union smaller competitors? or is that not true.
The reason all of the antitrust concerns were brushed aside was simple: the airline industry has always been too competitive. These mergers were the result of years of running in the red and chapter 11 bankruptcies. Airlines have only recently began reporting profits, mainly due to the reduced competition arising from mergers and ability to charge fees to ancillary services like baggage fees and cancellation/rebooking, but also due to lower fuel costs. It’ll take time for the benefits of scale to materialize. United, for example, only recently agreed on a labor contract unifying both United and Continental flight attendants since their merger.
Airline competition isn’t what it was 10-15 years ago, when legacy carriers like United/Delta/Continental/US/American etc had super high operating costs and low-cost carriers like Southwest swooped in with their uniform 737 fleet and fuel hedges and took away market share with ultra low fares. Those days are gone. Southwest has now ballooned to the biggest carrier by domestic passenger market share, and its fares are right up there with any other legacy competitor. I don’t think airlines are crippled at all. We’re far from inventing jetpacks, so flying remains the only option for long-distance travel. US carriers are now venturing into foreign markets that were previously untapped (middle east and China). The mergers were difficult to pull off due to technological and logistical challenges, but with time they will be resolved. Airlines are often hit the hardest. Any terrorist threat or incident leads to airline stocks tanking 5-10%. Zika took its toll too. Plus airlines don’t have a good track record of profitability. They’ve struggled far too long to be conceived as a good investment.
Seems to be a combination of unions and terrible management. To be honest I dont think many great managers want to work their way into that industry either as its hardly glamorous and ends terribly pretty frequently
Airlines being too competitive? I guess you could put it that way. But this just means that all the airlines are equally crippled by labor problems and probably bad management. When American Airlines takes multiple years to finalize its labor contract and 30% wage increases are considered a “victory” for the CEO, that should show that their operation is not the most efficient.
If airlines universally have zero profits, that shows that there is no industry innovation. Otherwise, some of the airlines will be able to offer some new service that (temporarily) puts them ahead of others. Some airlines will go out of business, new ones will arise, and the industry will move on. However, with the long labor negotiations, exclusive airport contracts, and stifling regulations, it is no surprise that airlines cannot change to become more efficient or offer superior customer experiences. Furthermore, high barriers to entry entrench existing, poorly managed airlines with legacy issues. In what other industry can bankrupt companies repeatedly become resurrected because there is no alternative service provider?
Even mergers like AA/CTL fail in increasing efficiency due to mismanagement. For instance, their unions remain separated and form clans, each doing different duties, servicing different locations, and even being restricted to different models of aircraft. Their operations were never integrated as promised. Delta Airlines evidently still uses a computer system from 1985 (with no backup). Why this has not improved is a mystery of incompetence.
Oh, I thinks it is reasonable to suspect politics was involved…