On November 27, the bankruptcy court in Manhattan approved the settlement between the Department of Justice (DoJ) and US Airways-American Airlines, paving the way for the airlines to merge finally in early December.  US Airways (NYSE:LCC) in a press release said that December 6 will be the last day of trading for its common stock listed on the New York Stock Exchange under the ticker LCC. Thereafter, the combined stock of the merged airlines, called American Airlines Group, will begin trading from December 9 on the Nasdaq under the ticker AAL.
Earlier in November, US Airways and American Airlines had reached a settlement with the Justice Department involving divestiture of slots/gates at seven airports across as many U.S. cities by the airlines. In our opinion, these concessions do not take much away from the $1 billion in annual synergies that are expected from the US Airways-American merger. Thus, the deal which avoided a court hearing was a good one for the airlines. See US Airways And American Airlines Set To Merge After Settlement With DoJ to read in detail about the concessions and what the merger means for the U.S. airline industry and fliers.
The Justice Department through these concessions seeks to enhance competition and maintain pressure on air fares on many routes especially those connecting Washington DC and New York. The department anticipates low cost carriers such as JetBlue (NASDAQ:JBLU) and Southwest (NYSE:LIUV) to acquire a large number of slots which will be vacated by US Airways and American Airlines. This expansion of low cost carriers is expected to lower average airfares on many routes through increased pricing pressure on legacy carriers. The department believes these settlement concessions are a good deal for fliers taking in to account the extended uncertainty which bankrupt American’s employees would have faced if the merger was scuttled altogether. See JetBlue And Southwest Gain From DoJ’s Settlement Terms On Big Airline Merger to read about how low cost carriers will likely expand at key airports particularly Washington Reagan and New York LaGuardia to benefit fliers.
We currently have a stock price estimate of $20.50 for US Airways, around 10% below its current market price.
American Set To Regain Position As The Largest Airline In The World
Through this merger, US Airways will jump ahead of its competitors to become part of the largest airline in the world. Each shareholder of the airline will receive one share of the combined airline, American Airlines Group. At the same time, American Airlines which filed for bankruptcy a couple of years back will surpass United (NYSE:UAL) through this merger to become the largest airline in the world.
In 2010, United, through its merger with Continental had surpassed Delta (NYSE:DAL) to become the largest carrier, while Delta in 2008 through its merger with Northwest had become the largest airline at the time. Both United and Delta had found their ways out of bankruptcy through a merger and have improved their financial health significantly since. American expects to repeat this performance, though in the most recent quarter, it already posted a profit on gains from cost reduction achieved through internal reorganization during bankruptcy.
Focus Now On Integration
Looking ahead, as the new American begins to combine the existing American with US Airways, it faces many challenges which include employees agreeing to a new single seniority list, combination of the two independent flight networks and IT systems, among others. Recent airline integration experiences particularly the United-Continental integration have shown that this period can bring inconvenience for fliers through depressed operational performance. Last year, United’s on-time arrival rate dipped sharply for a few months due to issues arising from its IT system integration with Continental. As a result, many passengers moved away from the carrier. In light of such potential pitfalls, American will have to plan its integration of US Airways very carefully, so that its fliers do not see a repeat of United-Continental issues and are forced to opt for other carriers.Notes:
- AMR Corporation Emergence From Chapter 11 And Merger Close Expected On Dec. 9, November 27 2013, www.usairways.com [↩]