The proposed merger to create the largest airline is running into trouble. Reports were out that AMR Corp. (AAMRQ) is facing an unexpected regulatory situation regarding its merger (takeover of, actually) with U.S. Airways Group Inc. (NYSE: LCC). This is not just bad news for the two airlines themselves. It is bad news for the entire airline sector. Before you worry too much about stock gains, the good news is that you (and yours truly) probably will get cheaper airplane tickets soon.
The Department of Justice has filed an antitrust lawsuit against AMR and U.S. Airways in the merger. The airlines are heading south as a result. U.S. Airways Group Inc. (NYSE: LCC) is down more than 8% at $17.20, against a 52-week range of $9.90 to $19.70. AMR shares are down 28% at $4.14, against a 52-week range of $0.36 to $7.15.
United Continental Holdings Inc. (NYSE: UAL) has fallen 4% to $31.77, against a 52-week range of $17.95 to $36.74. The reason it is dropping, even though it has completed its United-Continental merger, is that Continental will have less room to squeeze flyers now. This merger was a bad one for consumers as fees have risen, service has declined and airline tickets to major cities have gone higher. Its market cap is $11.5 billion.
Delta Air Lines Inc. (NYSE: DAL) tanked as well, with shares falling more than 8% to $19.35, against a 52-week range of $8.43 to $22.05. Delta is believed to be a merger candidate as an acquirer, but if the DOJ is going to block AMR and U.S. Airways from merging, then this may have a much harder time buying an airline with its $17 billion market cap.
Southwest Airlines Co. (NYSE: LUV) also tanked on the news. It has completed its AirTran buyout, but this leaves fewer opportunities for consolidated fare hikes for Southwest. It is also a rival in the Dallas hub against AMR. Southwest will be fine either way, but its drop of 2.5% to $13.38 compares to a 52-week range of $8.68 to $14.56. Southwest’s market cap is $9.5 billion.
JetBlue Airways Corp. (NASDAQ: JBLU) also fell, down more than 3% to $6.16, against a 52-week range of $4.76 to $7.28. We actually think that this implies that one of the carriers may take more of an interest in JetBlue as it is expanding into more international growth markets, but we also know that the blockage of an AMR-U.S. Air merger lowers pricing power for all airlines. JetBlue competes against both airlines, and its market cap is the smallest of all major carriers we follow, at only $1.75 billion.
Even Spirit Airlines Inc. (NASDAQ: SAVE) faces pressure from this merger being blocked. If the airline ticket space is going to be more competitive, then the lower comparable savings and add-on costs of this airline are both going to make the desire to fly this low-cost carrier that much lower. After falling 2.3% to $33.60, its 52-week range is $15.64 to $36.83 and its market cap is $2.45 billion.
This news is definitely bad for airlines and bad for airline investors. The good news for you and me is that this is one less competitor being taken out. That means lower airfare prices.
When Gordon Bethune comes on CNBC or another business outlet to say that this merger blockage is bad, just remember that he is on the side of the airlines rather than on the side of the consumer. Airlines want fewer and fewer competitors in their markets so that they can charge more for tickets and more for each service item.