What if US Airways and American Airlines Merged?

LCC: US Airways Group New US Airways Group logo
US Airways Group New US Airways Group

The decision by American Airlines (NYSE:AMR) to file for Chapter 11 protection may present the best opportunity yet for rival US Airways (NYSE:LCC) to bag a sorely needed consolidation partner. Having previously bid for Delta Air Lines (NYSE:DAL) in 2006 and United Airlines in 2008, US Airways CEO Doug Parker has made no secret of his wish to secure a merger. And with American Airlines now facing a wave of cost-cutting, analysts say Parker wants a deal now more than ever.

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US Airways Latecomer to the Consolidation Party

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Over the past decade, the overcrowded U.S. airline industry has gradually consolidated in response to a wave of major shocks – most notably the 9/11 terror attacks and the global financial crisis. Three years after filing for bankruptcy in 2005, Delta Air Lines and Northwest merged to become the world’s largest airline. Similarly, United Airlines merged with Continental Airlines last year following its own Chapter 11 move, creating United Continental Holdings (NYSE:UAL).

By teaming up with carefully selected rivals, airlines can tap into competitors’ route networks while also pooling resources for everything from ticketing to labor. The economies of scale created through mergers may arguably worsen the competitive landscape for passengers, but for airlines themselves, they tend to mean lower costs and more efficient resource allocation.

In the case of US Airways and American Airlines, the potential for synergies is clear. US Airways has a strong domestic presence in key hubs like Charlotte Douglas Airport and Washington Reagan Airport while American Airlines has a greater international footprint through its hub at New York’s JFK Airport. By feeding traffic into each other’s home bases, the two carriers should be able to optimize schedules and grow passenger revenue.

Chapter 11 Wipes the Slate Clean for American

While the outlook for American Airlines remains uncertain, most analysts expect bankruptcy to deliver long-term benefits for the carrier. Having struggled with high labor costs and a bloated route network for years, Chapter 11 protection will enable it to implement vital restructuring by ditching unprofitable bases and tearing up unsustainable union contracts.

Crucially, bankruptcy should also allow the carrier to speed up its fleet renewal program and cut fuel costs. American Airlines will have the option of scrapping leases on existing aircraft while prioritizing its recent order for 460 more fuel-efficient models. European lessor AerCap has already said it will talk to the carrier about salvaging a recent sale-and-leaseback deal for 35 modern Boeing 737-800s. [1] With so much capital at stake, other leasing firms are likely to follow suit.

Though not a silver bullet, Chapter 11 allowed Delta and United Continental to become significantly more competitive. This time around the only missing ingredient is a consolidation partner, and on that front US Airways will be waiting patiently in the wings. If the two carriers can merge into a leaner company, bankruptcy could ultimately be a good thing for the company.

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  1. AerCap American Sale-Leaseback On Hold, Aviation Week, Nov 30 2011 []