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Why the American Airlines–US Airways Merger Was Inevitable

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Jun. 16 2016, Updated 9:06 a.m. ET

US airline industry consolidation phase

The US airline industry has gone through a massive phase of consolidation in the past decade. In 2015, six major airlines held nearly 90% of the market share. Those airlines include United Continental (UAL), American Airlines (AAL), Delta Air Lines (DAL), Southwest Airlines (LUV), Air Canada, and JetBlue Airways (JBLU). This compares to 11 airlines holding 96% of the market share in 2005.

Below are some of the major mergers among airlines:

  • 2005: US Airways merges with America West Airlines
  • 2009: Northwest Airlines merges with Delta Air Lines
  • 2010: United Airlines merges with Continental Airlines
  • 2011: AirTran Airways merges with Southwest Airlines
  • 2013: American Airlines merges with US Airways

Airlines have benefited from consolidation, which has reduced completion, thus easing some pressure on pricing. Consolidation has also helped airlines manage their resources by aligning supply and demand more efficiently.

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Why was a merger inevitable for AAL?

In 2005, airline industry dynamics started changing. Delta Air Lines merged with Northwest, and United Airlines merged with Continental Airlines. As a result, American Airlines, an industry leader before, suddenly found itself much smaller than its legacy peers. United Airlines took the number-one spot followed by Delta Air Lines. That pushed American Airlines to third place.

Larger capacity and increased geographic coverage improved UAL’s and DAL’s operational efficiencies. It helped them improve yield, or revenue earned per seat.

So a merger was the natural course for American Airlines in order to regain its top position. The bankruptcy only strengthened the case for American Airlines to merge with another airline—US Airways.

Investors can gain coverage to airline stocks by investing in the SPDR S&P Transportation ETF (XTN).

In the next part of the series, we’ll see how American Airlines and US Airways overcame objections from the United States Department of Justice.

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