(AMR) Merger Relief for American Airlines

The rumors about American Airlines, a subsidiary of AMR Corp. (AMR), merging with another airline have been heating up since the company filed for bankruptcy protection in November last year. Finally, the market buzz appears to be coming true with the three labor unions of American Airlines supporting a plan for the bankrupt carrier’s merger with rival US Airways Group Inc. (LCC), the fifth largest U.S. airline.

This move represents a first step toward a consolidation, though creditors, directors, and management are yet to give their green signal.

The three unions – Allied Pilots Association, Association of Professional Flight Attendants and Transport Workers Union – represent as many as 55,000 employees at American Airlines. According to them, the merger would save about 6,200 jobs as opposed to what AMR Corp. can as a standalone entity, and speed up the restructuring process.

We believe the potential American Airlines-US Airways merger could change the competitive dynamics of the airline industry. The combination would be strong enough in scope and size to compete with their larger rivals, United Continental Holdings Inc. (UAL) and Delta Airlines Inc. (DAL). In fact, the combination would create an airline identical to the largest U.S. air carrier, UnitedContinental, in terms of revenue and traffic, and would be better than the second largest airline, Delta.

Further, the new carrier would leapfrog other airlines in the U.S. East Coast and Midwest. The potential combination would have lesser overlapping routes. The consolidation of American Airlines, if successful, would be the fourth in the last three years.

We see American Airlines-US Airways as the hottest pair in the industry as it will be in the best interest of the customers. Despite the long-standing problems with its pilot union, US Airways has been a profitable airline for the past several years, delivering best service to passengers with a top management team. On the other hand, American Airlines is a loss-making entity for several years due to its inefficient management team. In fact, it is the worst air carrier in the industry in terms of customer satisfaction.

Moreover, US Airways has been looking for a merger candidate following its bankruptcy protection filing in 2002. The company failed to acquire Delta, when it went bankrupt in 2006. As a result, US Airways will see American Airlines’ bankruptcy as a great opportunity to take over its larger rival.

We believe this is an opportune moment for American Airlines to consolidate in order to regain its lost profits and operational efficiency. As United and Delta will be long-term beneficiaries following the merger actions on both capacity and cost fronts, we believe American Airlines will also emerge as a successful candidate by balancing its debt level and lowering costs.

Nevertheless, any potential merger with AMR will take several months or a year to materialize, as American Airlines is yet to complete its court restructuring process and will undergo antitrust scrutiny.

Effective early this year, the shares of American Airlines were de-listed from the New York Stock Exchange. The company currently has a Zacks #3 (Hold) Rank for US Airways for the short term (1–3 months).

DELTA AIR LINES (DAL): Free Stock Analysis Report

US AIRWAYS GRP (LCC): Free Stock Analysis Report

UNITED CONT HLD (UAL): Free Stock Analysis Report

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