Another airline consolidation is seemingly in the wind. Chances of American Airlines, a wholly owned subsidiary of AMR Corporation (AMR) merging with US Airways Group Inc. (LCC) seem high.
Both companies are struggling to remain competitive amid steeply rising fuel prices and a weak travel demand environment. US Airways, the fifth largest U.S. airline, has long-standing problems with its pilot union. Troubles at American Airlines have also intensified due to high labor costs and a debt-heavy balance sheet.
The story is equally bleak at AMR Corp. The company’s shares lost more than three-fourths of their value this year. Yesterday, it plummeted 84% in the last trade.
American Airlines filed for bankruptcy protection, which would help it to cut down expenses and position it for consolidation. Looking back, bankruptcies in the airline industry pave the way for mergers and acquisitions. This is because carriers seek protection to emerge as a low cost provider with strong competitive position in the industry. American Airlines was the last largest carrier that filed for bankruptcy protection.
This move is similar to the United Continental Holdings Inc. (UAL) and Delta Air Lines Inc. (DAL) actions. Delta and Northwest filed for bankruptcy protection in 2005 and later on merged in 2008. Likewise, United Airlines merged with Continental Airlines last year after filing for bankruptcy. Both United and Delta are the long-term beneficiaries following the merger actions, both on the capacity and cost fronts, and emerged as the largest U.S. airlines in the industry pushing Delta to the third position.
The merger of American Airlines and US Airways, if successful, would be the fourth in the last three years following the oil price hike in 2008 and economic downturn in 2009. The third was the consolidation of AirTran Holdings and the largest U.S. low-cost airline Southwest Airlines (LUV) completed this year.
Though the AMR-LCC merger deal is not official, we believe it could change the competitive dynamics of the airline industry. 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 might take American Airlines’ bankruptcy as a great opportunity to take over its larger rival.
We are currently maintaining our short-term (1-3 months) Hold rating on both American Airlines and US Airways with the Zacks #3 (Hold) Rank.
