When a deal dies in public, a certain kind of silence descends upon a Chicago boardroom. You can practically picture Scott Kirby realizing that the door wasn’t simply closed after reading American Airlines’ April 17 statement, which referred to the entire concept as “anticompetitive.” Reporters were watching as it was chained shut.
Monday’s closing price for United Airlines’ stock was $91.90, down 1.18% for the day and about 17% for the year. Such numbers don’t tell you much on their own. The atmosphere surrounding them reveals something: a CEO who was once the president of the United States is now openly defending his former employer’s refusal to even return his calls. Kirby seemed to genuinely think that this was about creating something rather than dismantling a rival. It’s unclear if anyone outside of United’s executive office held that opinion.
If the merger had been successful, it would have produced the biggest domestic airline in the US. American CEO Robert Isom didn’t hold back. Speaking on CNBC last week, President Trump expressed his complete disapproval of the concept. In her remarks, Senator Elizabeth Warren used language that frequently follows discussions of industry consolidation: fares, competition, and consumers. The political math was never very effective. Kirby may have been aware of this and still made an attempt, hoping that a compelling “compete with foreign carriers” pitch would make it to Washington. It didn’t.
In the meantime, when the Strait of Hormuz becomes uneasy, jet fuel, the silent dictator of the airline industry, continues to do what jet fuel does. Since the fighting intensified in late February, prices have more than doubled in some markets. United reduced its full-year profit forecast to a range of $7 to $11 per share, which is so broad it almost seems like a shrug. $4 ranges are generally disliked by investors. They imply that management is also unsure.
The operational reality beneath all of this can be seen if you stroll past O’Hare on a weekday afternoon: gate agents navigating delays, planes parked on taxiways, and the FAA’s recent directive eliminating roughly 300 daily peak summer flights from the schedule. For years, United and American have been at odds over O’Hare gate space. They are now compelled to share less of it. In this area of the business, rivalry is real and tangible. It’s geography.
For their part, analysts continue to be largely optimistic, which presents a little conundrum. In late April, BMO Capital increased its goal to $130. UBS is currently at $135. A 30% increase from current levels would be implied by the consensus price target, which is close to $121. The difference between what the market is doing and what analysts predict it should do is difficult to ignore. That gap can occasionally close upward. It just sits there sometimes.
You get the impression that United’s current story isn’t really about a failed merger as you watch this play out. It concerns an airline that is operating efficiently (Q1 revenue exceeded forecasts, EPS exceeded expectations) but is being squeezed by factors that are nearly entirely beyond its control. Geopolitics is fuel. The White House opposes consolidation. a rival who would rather make public declarations than engage in private discussions.
Kirby is still adamant that the transaction would have passed regulatory scrutiny, divestitures included. Perhaps he is correct. Perhaps that’s what CEOs say when they have no choice but to acknowledge that they misread the room. In any case, United advances on its own while the stock, which is damaged, undervalued by some metrics, and exposed by others, awaits the next trigger. The obvious one is the July earnings report. Crude prices are the most erratic. Investors appear to think this is still a story. They simply don’t know which chapter they are in.