Four Reasons Why American Should Merge With US Airways

by Trefis Team
-9.10%
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22.55
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US Airways
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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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US Airways Logo
  • commented 1 years ago
  • tags: DAL AMR LCC UAL LUV
  • Flight Attendants @ Usairways just voted down a proposed contract for the second time in 5 months! unless there is a buy out for are Flight Attendants with 40 years (at least) or more and a pay scale that can accomodate a group that will work for at least 50 years! there will be no deal by our group! stand tough AA! we will ! and just maybe we will be the highest payed in the industry along with being the Largest, and dare I say a "buy out" for employees that worked more than half there lives for one company weather it be USAIR OR AA. Oh and by the way to Chris below who is hoping for something imaginary! No groups are merged here at Us Airways, west doesn't talk to east and vise versa. after seven years we are still fighting over jumpseat policy! we have a long way to go for any happy ending. However the flight attendants did agree, that the company could not offer us a deal that was worthy of the work we do everyday to keep the customers coming back.
    US Airways Logo
  • commented 2 years ago
  • tags: DAL AMR LCC UAL LUV
  • Dave, some of AA's unions were part of national union organizations previously. APFA the flight attendant union had previous to TWA stapled rosters so there was precedent. Better to remain silent if you don't have a clue as to what you're talking about. The pilots of TWA were not all stapled they had a complex integration system. Back to the flight attendants, TWAs union agreed to the seniority integration that took place so those folks have their union to blame if they feel they were treated unfairly. Again you don't speak from an informed stance so sit quietly until you have the facts. Enjoy your day!
    US Airways Logo
  • commented 2 years ago
  • tags: DAL AMR LCC UAL LUV
  • The US Airways employees better watch their backs. AA unions (and I use the term loosely) do NOT abide by Union Rules. They ignored the Allegheny/Mohawk merger rules (which all airline unions were governed by for 50 years...from USAirways history) and stapled TWA's employees to the bottom of the seniority list. This had NEVER been done by one union to another union before. AA's unions did it company wide. AA has never joined any of the other MAJOR airline unions, but always stayed on their own. And since the AA employees outnumber USAirs employees, they will vote THEIR unions in, and then SCREW OVER the USAIR employees, even though AA was the carier in bankruptcy. Watch your backs USAir Employees. Get YOUR contracts, and YOUR Unions in place BEFORE you allow the mergers to go thru!!!!
    US Airways Logo
  • commented 2 years ago
  • tags: DAL AMR LCC UAL LUV
  • US Airways and AWA ARE merged. The pilot and F/A groups aren't merged into a single workgroup but has NOTHING to do with the airline as a SINGLE CERTIFICATE CARRIER. Passengers could care less about the internal makings of a company. Only people who refer to these two companies as USAir and AirWest would be so uneducated.
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  • commented 2 years ago
  • tags: DAL AMR LCC UAL LUV
  • USAIR and Air West operate as two different airlines due to pilot contracts(both ALPA0. Put AA pilots(APA) into the mix, and you'd have three different airlines, or "back to go". Article written by a numbers man, not an airline man.