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Why I Changed My Mind on American Airlines (AAL)
By: Martin Tillier
In the interest of transparency, I should start this piece with a confession. I have not been a fan of large US airlines for the last 25 years or so; neither as corporate entities nor investments. In the case of the new American Airlines Group stock (AAL), however, I am coming around, at least on the investment side.
My dislike originated, at least in part, for personal and completely shallow reasons. Back in the late 1980s and early 1990s I was a British guy, living in Japan and engaged to an American. As such, I regularly flew to both the UK and the US. Flying back home to London was always fun. Virgin Atlantic had just begun to shake up air travel in my native land, and British Airways was beginning to follow their lead in staffing flights with attractive, enthusiastic young flight attendants. I told you, it was shallow, but it made it fun to fly.
Returning to the US with my then fiancée, now my wife, on the other hand, was always a painful experience. The major US carriers awarded long haul routes to attendants based on seniority and many seemed to be burnt out on the whole “customer service” thing. They had a reputation in the expat community for being surly and bad tempered. This may have been exaggerated, but there is no doubt that they were not as much fun as the young, vibrant staff on Virgin.
Over the years, that distaste for the experience of travelling with large US airlines morphed into a dislike of the corporations. They undoubtedly had a point when they (repeatedly) bleated about the national carriers that were their competition receiving unfair subsidies, but the complaints quickly became tiresome and began to sound like so much whining. When low cost domestic airlines emerged as competitors they did their best to maintain their control of key routes by complaining that they had some sought of god-given right to a cartel, and then belatedly cut prices. They were, however, unable to cut costs commensurately so, seemingly in order to get out of labor agreements, bankruptcy became a tactic rather than a last resort. This led to even more disgruntled staff and the experience of flying with any of the major US carriers got even worse.
When American Airlines announced it was pursuing a merger with US Airways following bankruptcies in 2011 (American) and 2012 (US Airways) I was somewhat skeptical. In the past, mergers (including US Airways merger with America West) haven’t worked out too well. All they ever seemed to achieve was to produce a larger losing entity with even more over capacity, while at the same time demoralizing staff even further.
Talking of capacity, some, including Adam Levine-Weinberg in this USA Today piece, believe that AAL’s commitment to new planes is a liability that they cannot escape. There may be some truth to that, but, given an improving economy, investing at a time when one’s competitors are all scrambling to reduce capacity may well look pretty smart in a few years. This is especially true with aircraft, where recent advances in fuel efficiency and technology make replacing an old fleet less of a risk.
The CEO of the new company, Doug Parker, has extensive experience of the problems of integration following the aforementioned US Airways/America West merger in 2005 and is well aware of the pitfalls and possibilities in this venture. We all know what assumptions can do, but until proven otherwise an assumption that he has learned from past mistakes is reasonable.
Parker has actually made a recent decision that may seem inconsequential to many, but given the morale problems that have plagued domestic airlines, may be significant and a sign of things to come. Allowing workers to decide the livery that the new company will use won’t directly affect the bottom line, but giving employees some sense of ownership in the new venture is, to my mind, a long overdue positive. As Richard Branson realized when launching Virgin, the morale of customer-facing staff is important.
Technical analysis of a stock that has only been trading for two weeks is pointless, but it does appear that the initial pricing was pretty close to the mark. There has been some appreciation, but AAL is trading at a forward P/E around 7, roughly half that of Southwest Air (LUV) for example. Hesitancy is understandable, but that seems overly pessimistic and for the first time in decades there may be a large, traditional US airline stock that I feel confident about.
Even though every commentator will likely tell you that any analysis they offer is the result of dispassionate, fact based research, the fact is that in many cases we have a predisposition one way or another when we begin to look at a stock. In this case, I was looking for reasons to continue my dislike and distrust of American and all US carriers. What I found, however, was that, while I am not ready to display the evangelical fanaticism of many recent converts to a cause, at around $26, AAL looks like a decent bet.