Four Reasons Why American Should Merge With US Airways

Running a profitable airline is becoming more and more difficult for the airlines as rising operational costs accompanied with uncertain macroeconomic environment weigh on the bottom-line. As some of the relatively better performing airlines such as Delta Air Lines (NYSE:DAL), US Airways (NYSE:LCC), United-Airlines (NYSE:UAL) looked at growth opportunities, absorbing a non-performing airline has been a successful proposition.

Back in 2005, America West came to rescue US Airways, which filed for Chapter 11 bankruptcy in 2004. Now, US Airways is ready to take up a similar opportunity with bankrupt American Airlines. US Airways has not made an official bid for this merger as AMR’ management, the parent company of American, is looking at alternative bail-out strategies. However, the carrier is reaching out to the labor unions and steadily advancing to push AMR towards considering a merger with US Airways. We believe that this merger presents tremendous opportunities for both the airlines and is going to bring considerable amount of cost synergies on successful integration. Below, we list some of the prime reasons for this merger to go through.
See our complete analysis of US Airways

Better Restructuring Plans

Lay-offs are the biggest threat that worries the employees as a company files for bankruptcy. This merger proposes to cut 6200 fewer jobs compared to AMR’s stand-alone strategy. US Airways has been supportive to the labor unions by offering a $130 million lower cut for these unions compared to AMR. At the same time, US Airways’ proposal also promises annual savings of $1.2 billion which seems much more of a lucrative deal than AMR’s target of $3 billion savings by 2017. US Airways merger plan clearly presents a win-win situation for both the work force as well the management.

Operating Expense Optimization

Salaries and related cost is the second largest component of an airline’s operational expenses next to fuel. Analysis reported by Airlinefinancials.com indicates that American Airlines and US Airways are at extremes when it comes to labor costs per mile.  As the merger comes along, we believe that a considerable amount of labor cost savings can be achieved through layoffs and other cost reductions.

Further, the fleet of US Airways is dominated by Airbus with 72% share and Boeing taking the rest while American’s fleet is entirely dominated by Boeing. Earlier, US airways was at a disadvantage in terms of maintenance expenses by operating a diverse fleet. The maintenance costs of US airways can be controlled post the merger. Also, the integration to a single system also presents opportunities for potential cost synergies on the operational front.

Leveraging the Hubs

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

More Control Over the Market

The integration of American and US Airways would make it one of largest airline in terms of ASM (Available Seat Miles) and allow it to emerge as a strong competitor to Delta and United Continental. As the M&A deals become more prominent in the US airline sector, it also provides more control to the major players in the market in revising passenger fares.

We have a Trefis price estimate of $12 for US Airways, which implies ~10% upside from its current market price.

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