US Airways’ Merger With American Helps Mitigate The Impact Of Low Cost Carriers

by Trefis Team
-9.10%
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22.55
Market
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Trefis
LCC
US Airways
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Quick Take

  • US Airways gets nearly three-fourth of its total passenger traffic from domestic U.S. market where it faces increasing competition from low-cost carriers.
  • The merger with American Airlines will bring scale and in particular international routes to US Airways’ network. This will lower the impact from low-cost carriers.

US Airways (NYSE:LCC) is currently the fifth largest airline in the U.S. behind United (NYSE:UAL), Delta (NYSE:DAL), American Airlines and Southwest (NYSE:LUV) as measured by passenger traffic. The carrier offers flight service to nearly 200 destinations of which 154 are in the domestic U.S. market. It is here that US Airways faces one of its biggest challenges – intense and increasing competition from low-cost carriers, particularly Southwest.

The merger with American Airlines will address this primary challenge by bringing scale to US Airways’ flight network. The merged entity will have a much lower dependence on the domestic U.S. market, which will make it less vulnerable to price competition from low-cost carriers (which do not have a significant presence in international markets). In particular, US Airways will benefit from American Airlines’ extensive flight service to destinations in Latin America and its presence on high growth routes to destinations in Asia-Pacific.

See our complete analysis of US Airways here

US Airways faces intense competition from low cost carriers

US Airways has hubs at Charlotte, Philadelphia and Phoenix with Washington as a focus city. Southwest, the largest low-cost carrier in the U.S., has a significant presence in all of these cities and the major routes that connect these cities. For instance, at Phoenix, which is also its corporate headquarters, US Airways controls 56 gates and operates 259 daily flights. [1] Southwest on the other hand controls 24 gates and has 167 daily departures from Phoenix. [2] Many of these flights have same destinations which makes US Airways vulnerable to price competition from Southwest.

Southwest, which has a specially designed low-cost model, is able to offer lower fares on its flights. US Airways at several instances is not able to match these due to its higher fixed costs. This results in US Airways losing passenger traffic to Southwest.

In all, competition from Southwest and other low-cost carriers like JetBlue, Allegiant, Frontier, Virgin America and Spirit impacts US Airways severely as it gets nearly 73% of its total passenger traffic from the domestic U.S. market. In comparison, American Airlines gets nearly 42% of its passenger traffic from international markets. [3]

Merger with American Airlines will reduce the impact from low cost carriers

Thus, the merger with American Airlines will increase the proportion of international passenger traffic for US Airways. This will allow the merged entity to offset the less profitable domestic fares with more profitable international fares.

Specifically, American Airlines will bring flights to 41 new destinations in Latin America and 5 destinations in Asia-Pacific to US Airways’ network. [4] Additionally, most of these routes to Latin America and Asia-Pacific are experiencing strong growth in demand for flights due to the fast-growing economies of these regions.

Apart from the addition of international routes, the scale that American Airlines will bring to US Airways will also reduce the impact of price competition from low-cost carriers. Currently, US Airways operates around 3,000 daily flights to 198 destinations in 28 countries. [1] The merger with American Airlines will more than double this to 6,700 daily flights to 336 destinations in 53 countries. [5]

The two carriers are expecting to close their merger in the third quarter of 2013. We currently have a stock price estimate of $12.73 for US Airways, approximately 5% below its current market price.

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Notes:
  1. US Airways fact sheet, February 22 2013, www.usairways.com [] []
  2. Southwest’s corporate fact sheet, February 22 2013, www.usairways.com []
  3. US Airways and American Airlines RPM details, February 22 2013, www.transtats.bts.gov []
  4. American Airlines and US Airways merger investor presentation, February 14 2013, www.aa.com []
  5. American Airlines and US Airways To Create A Premier Global Carrier —The New American Airlines, February 14 2013, www.usairways.com []
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