American Airlines Group Merger Anniversary: What Challenges Lie Ahead?

By Markets Fool.com

On Dec. 9, 2013, American Airlines Group was officially formed from the merger of US Airways and American Airlines. Since then, the new airline has worked to integrate its operations as it moves toward realizing the efficiencies of operating as a single carrier.

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One year after the merger, the challenges are far from over, with some of the most important events coming up late this year and in 2015.

Labor
When plans for the US Airways-American Airlines merger were drawn up, the companies knewlabor would play a key role in the success of the tie-up. In fact, labor unions had already been working in support of the merger before the official agreement was announced.

Now, American Airlines Group is looking to establish contracts to cover workers from both the US Airways and American Airlines sides of the company so workers from each side can operate under the same terms instead of under contracts specific to either US Airways or American Airlines.Flight attendants were among the first groups to vote on a new contract, rejecting the offer last month by only 16 votes from more than 16,000 cast.

Source: American Airlines Group.

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The contract, which contained $193 million in added value for flight attendants compared to the existing contracts,had been negotiated between the management of American Airlines Group and the Association of Professional Flight Attendants. However, the narrow rejection sent talks to binding arbitration;current estimates show flight attendants would only get a contract with $112 million in added value.

You might be wondering why the flight attendants voted against the negotiated contract. While there's no way to determine exactly why, some of the reasons put forth by flight attendants, the union, and analysts include:

  • The negotiated contract did not contain profit-sharing, which some other airlines provide. American Airlines Group is now producing record profits and flight attendants wanted a larger share.
  • Some flight attendants might have been unaware of the arbitration and thought a rejected contract could be renegotiated.
  • Concerns over work rules and other concessions granted from American Airlines' 2011 bankruptcy.

The hearing over the flight attendants' contract has already been held, with a decision from the arbitration panel expected in the near future.

American Airlines Group has also been working to seal a contract with its pilots, who are represented by the Allied Pilots Association. In this case, management and the union are still working on a deal, with both sides appearing to want to avoid arbitration.Investors should keep an eye on whether the two parties can reach an agreement on their own or whether the airline will take up its option of forcing arbitration.

Looking further ahead, management will also have to negotiate new contacts with the unions representing baggage handlers, mechanics, and other ground workers. Current expectations are that negotiations will begin in 2015 with the goal of developing a contract as soon as reasonably possible..

Tech integration
Next year, American Airlines Group will take another major step in integrating the company's operations by combining the two reservations systems. Ifeverything goes smoothly, customers won't notice a thing -- though that same stepcaused technical issues resulting in flight cancellations for United Continental during its own merger just a few years ago.

American Airlines Group has decided on using travel industry technology specialist Sabre for the combined reservation system. This was expected, as American Airlines already uses the Sabre system.

Operating certificate
Despite trading under one company name, American Airlines and US Airways are still officially two separate airlines. But American Airlines Group expects next year to receive a single operating certificate for both airlines operating under the group's name.

Source: American Airlines Group

Of note is that their cargo operations have already been combined under a single waybill.Obtaining a single operating certificate meansAmerican Airlines Group will finally be seen as one airline by regulators, leading to potential gains in efficiency in internal operations and interactions with those regulators.

Moving forward
American Airlines Group's first year since the merger has been a broad-based success. Record profits have been reported, operational integration is progressing smoothly, and the airline's stock has roughly doubled since Dec. 9, 2013.

But challenges remain that investors should keep an eye on, with special focuses on systems integration and labor contracts.

The article American Airlines Group Merger Anniversary: What Challenges Lie Ahead? originally appeared on Fool.com.

Alexander MacLennan owns shares of American Airlines Group andhas the following options: long January 2015 $17 calls on American Airlines Group, long January 2015 $32 calls on American Airlines Group, long January 2017 $25 calls on American Airlines Group, and long January 2016 $60 calls on American Airlines Group. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.