The closest we can get to seeing how a merged airline will operate is Delta Air Lines which completed its merger long enough ago that nearly all of the integration has been completed. Delta has been able to consolidate existing hubs and shrink others seen in the shrinking of the Cincinnati operations and the enlargement of Delta operations out of former some former Northwest hubs. Delta has been able to record a steady increase in earnings since the 2008 merger but it is not clear how much of this increase was from the merger and how much was from generally improving economic conditions.
However, the largest benefits for airlines could not be realized simply by the Delta-Northwest merger. As it was a case of one airline merging with another, it only reduced the number of large-scale competitors by one. A stronger airline oligopoly will only be able to show its potential once United Continental is fully integrated and the US Airways Group, Inc. (NYSE:LCC) American merger is completed. Since reductions in competition and capacity will not be fully realized in the time frame current earnings estimates cover, the estimates listed below reflect the effects of the Delta and United mergers on the industry without taking into account the benefits of the US Airways Group, Inc. (NYSE:LCC) merger.
Airline EPS 2011-14
| Airline | 2011 | 2012 | est. 2013 | est. 2014 |
| Delta Air Lines | $1.01 | $1.19 | $2.57 | $2.72 |
| United Continental | $2.26 | ($2.18) | $3.37 | $4.84 |
| US Airways | $0.44 | $3.28 | $2.99 | $3.14 |
Source: 4-traders.com
There will likely be major integration expenses at US Airways over at least the next couple years so this airline’s earnings estimates should be taken with a grain of salt. But for Delta and United Continental Holdings Inc (NYSE:UAL), the future appears much brighter as the airlines will have greater control in shaping it how they want, whether through additional capacity cuts, fare increases, or even more fee increases.
Airline oligopoly
One of the most profitable lines of business is an unregulated monopoly. Close behind is a deregulated oligopoly. As the largest American carriers have merged, there is an opportunity for the mega-carriers to realize the benefits of reduced competition by further implementing many of the changes already taking place. Coupled with greater economies of scale, airline earnings should rise not only justifying a higher share price based on earnings but also strengthening the airlines financially. In the end, as airline consumers, we will probably lose in the form of less choice and higher prices, but as airline shareholders, we will probably win through higher stock prices and financially stronger airlines.
Alexander MacLennan owns shares of Delta Air Lines. The Motley Fool has no position in any of the stocks mentioned.
The article When Consumers’ Losses Are Shareholders’ Gains originally appeared on Fool.com.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
