2011 has been a year most international airlines would rather forget. In fact, for most companies listed on any global exchange, 2011 is hardly a year for the record books.
Cyclical by nature, airline stocks are directly affected by volatility and uncertainty on global markets and are the first to feel the impact of a downturn. Factor in a heavily unionised workforce and commodity price pressures and it’s little wonder investors have a front seat at the American Airlines funeral.
On Tuesday American Airlines’ parent company AMR applied for Chapter 11 bankruptcy protection and requested its leases on two dozen planes be liquidated. This news shouldn’t have come as a huge surprise to investors. Cost pressures from an ageing fleet as well as a recent rejection of a new pay contract by workers has seen American Airlines run out of options to stay afloat in what is a difficult time for airlines around the globe. Nevertheless the filing obviously came as a surprise to many as shares fell 84% in a single session.
The issues facing AMR appear to be very similar to those facing Australia’s largest carrier, Qantas. The stock performances of AMR and QAN throughout 2011 are frighteningly alike.
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Despite the parallels, there are key differences, most notably the US operating environment. Competitive pressures on AMR were greatly enhanced after government intervention allowed greater merger activity between the majors, which made it harder for those airlines flying solo. The recent merger between United and Continental created a US airline super power with cost synergies solo carrier cannot match.
The one logical option for AMR appears to be a merger with its most likely US suitor, US Airways. Without a merger, American Airlines will struggle to compete with the merged Continental and United or even Delta, which purchased Northwest in 2008. A merger seems the only lifeline left (outside of further government assistance) for AMR to enter 2012 on a path to cost efficiency and eventual profitability. The merger option is a case of last in, worst dressed. Remember when you picked teams for soccer as a child – if you had the final pick you got the last kid left on the bench, the lazy one who no-one wanted on their team. Now that teams have largely been picked, US Airways is still sitting on bench after being dumped by both Delta and United in previous rounds of bidding. Meanwhile, American Airlines is now ranked number three (and falling) in the world’s largest airline list.
An American Airlines and US Airways merger now seems logical, even inevitable and maybe Qantas is headed for a similar fate. The Australian flagship carrier is flying into the terminal headwind of labour costs and has made it clear they cannot remain profitable or even viable unless something changes. The ongoing wage dispute is directly threatening Australia’s most publicly-recognisable company and its future to operate internationally. Further, Qantas has an immense flow-on effect to other industries. Hospitality, tourism, business and mining all have a stake in Qantas’ presence as the ‘Australian airline’.
Perhaps Qantas needs to heed of lessons from its US counterparts. Maybe merger/acquisition activity is the most viable way to remain profitable in 2012 and beyond. One thing we do know, no Australian airline is capable of a merger on such a scale. This means jobs shift overseas, as do a share of profits. –A small price to pay when the next, very probable alternative is a slow and painful death whilst the global airline industry seeks consolidation and profitability.
Something has to change as 2012 could follow a similar path to 2011 and most would agree, 2011 is a year most airlines would rather forget.
Stay ahead of the game,