American Airlines (AAL, Financial), the world's largest carrier by traffic, had until recently been dealing with too many things on its plate. Yet, the future seems to be bright for American Airlines thanks to the merger with US Airlines.
Challenges Galore
It might be recalled that the company was facing a bankruptcy until the merger towards the end of last year with US Airlines. Since then, it has been a somewhat bumpy ride for the U.S. carrier.
To begin with, the company is facing a labor crisis with one of the biggest Unions of US Airlines threatening to go on strike. Apparently they also have the support of unions of American Airlines. The International Association of Machinists and Aerospace Workers, comprising 14,000 US Airways machinists, mechanics and fleet service workers may go on strike soon. According to them, US Airlines workers earn about 10% less than their counterparts at American Airlines. Currently, the mediation board has asked for a cooling period of 30 days, during which they will try to bargain a deal. However, if talks fail, the strike could badly cripple operations.
Additionally, the company had to comply with gate divestiture requirements as directed by U.S. Justice Department as part of an Anti-trust lawsuit it faced over the merger with US Airlines. The company had to give up take-off and landing rights at Reagan National and New York LaGuardia. It also gave up gates at Dallas Love Field and airports in Chicago, Boston, Los Angeles and Miami. All this, did impact the volume of business.
Threat from Competitors
Delta Air Lines (DAL, Financial) has taken giant strides in its fight with American, especially over the lucrative market for business travel between New York and London.
Delta with its new partnership with Virgin Atlantic and its own reputation in New York has already made giant inroads into this segment. Virgin Atlantic, known to be the airline that implements latest technology, recently tested wearable devices on Flight attendants to provide that extra edge that passengers seek on the New York London route. These customers are tech-savvy Wall Street professionals who don’t mind paying a hefty sum for their travels.
American is planning to counter this threat by putting its best planes on the New York to London route: a new extended range Boeing 777-300 that has separate cabins for first and business class with fully reclining seats, as well as coach seats with power outlets and USB jacks.
The Silver Lining
American, now having a completely new management team, is finally looking to turnaround years of under-investment and losses. All this was possible from its recent merger with U.S Airlines.
The main advantage that the company can capitalise on is the fact that thanks to the merger, numerous routes have opened up for which there is no competition now. This provides a tremendous opportunity to American.
The shares have soared more than 50% in no time, but experts are expecting a strong resistance around $40 levels.
The Street’s Jim Cramer has even gone on to recommend this airline stock claiming that the last time he recommended an airline stock was in 1984.
One must bear in mind though, that this cycle of rising expectation and rising stock price may be unsustainable and the stock is due for a strong correction.
