Why American should merge with US Airways

A deal could offer significant opportunities for both carriers.

By Trefis Jun 7, 2012 10:53AM
TrefisRunning a profitable airline is becoming more and more difficult as rising operational costs, accompanied by an uncertain macroeconomic environment, weigh on the bottom line.

As some of the better-performing airlines, such as Delta Air Lines (DAL), US Airways (LCC), United Continental (UAL), consider growth opportunities, absorbing a non-performing airline may be an attractive proposition.

Back in 2005, America West came to the rescue of US Airways, which had filed for Chapter 11 bankruptcy the previous year. Now, US Airways is ready to take up a similar opportunity with bankrupt American Airlines. US Airways has not yet made an official bid for the airline as AMR, tits parent company, is looking at alternative bailout strategies. However, US Airways is reaching out to the labor unions and steadily pushing AMR toward considering a merger.  A merger would present tremendous opportunities for both airlines and successful integration would bring considerable cost synergies.

Below are some of the prime reasons for the merger.

Better restructuring plans

Layoffs are the biggest worry for employees when a company files for bankruptcy. The proposed merger would cut 6,200 fewer jobs than AMR's stand-alone strategy. US Airways has offered the labor unions $130 million less in cuts than AMR. At the same time, US Airways' proposal is promising annual savings of $1.2 billion, versus AMR's target of $3 billion in savings by 2017. US Airways' merger plan clearly presents a win-win situation for both the work force and management.

Operating expense optimization

Salaries and related costs are the second-largest component of an airline's operational expenses, after fuel. According to Airlinefinancials.com, American Airlines and US Airways are at extremes when it comes to labor costs per mile. A merger would yield considerable  savings through layoffs and other cost reductions.

Further, US Airways' fleet is dominated by Airbus, with a 72% share, while American's fleet is entirely dominated by Boeing. As a result of operating a diverse fleet, US Airways has had higher maintenance expenses. These costs could be better controlled post merger. Also, the integration to a single system presents opportunities for potential cost synergies on the operational front.

US Airways Non Fuel Expenses as percent of Passenger Revenues

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 network 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 increase passenger revenue.

More control over the market

The combination of American and US Airways would produce 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 M&A deals become more prominent in the U.S. airline sector, they also provide more control to the major players in the market in revising passenger fares.

US Airways US Passenger Revenue per Revenue Passenger Mile

We have a Trefis price estimate of $12 for US Airways, which implies ~10% upside from its current market price.

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