As the time period given by the bankruptcy court to American Airlines is only days away, many people expect American Airlines (AAMRQ.PK) and US Airways (LCC) to have a merger. At this point, I would be really surprised if the merger didn't happen really soon.
For a long time, American Airlines resisted a possible merger with US Airways because it wanted to emerge from the bankruptcy as a standalone company before considering its merger options. This would allow for American Airlines to have a stronger hand than it does right now when negotiating with other airline companies for a merger. Last summer, the court gave American Airlines a few months for the company to come up with a feasible and realistic business plan, which would have to be approved by both the bankruptcy court and the creditors of American Airlines (which includes US Airways who happens to own some debt of American Airlines).
The CEO of American Airlines, Tom Horton, still continues to believe that not only American Airlines can come out of bankruptcy as a standalone company, but it can also buy US Airways and become the ruler of the merged company. In this scenario, Horton would become the CEO of the merged company. The more likely option is that US Airways will acquire American Airlines and Doug Parker (the CEO of US Airways) will become the CEO of the merged company. This is what Doug Parker has been campaigning for since American Airlines announced bankruptcy many months ago.
Many employees of American Airlines are tired of Tom Horton and they want a new leadership to take control of the company. This is why the major employee unions in the company have been in support of a merger where Doug Parker would control the merged company. The employees at American Airlines no longer trust Tim Horton and time is running out for him.
On Friday, Horton spoke with the company's pilots to convince them that the company should emerge from the bankruptcy as a standalone company before negotiating any type of merger deals with anyone. Of course, Mr. Horton failed to impress the pilots, who are scheduled to meet with the CEO of US Airways next week.
I believe that this is a win-win situation for the investors of US Airways. If American Airlines comes out of bankruptcy as a standalone company against all odds, it will end up acquiring US Airways with a premium. If it ends up merging with US Airways before emerging from the bankruptcy, the US Airlines will become the largest airline in the country. While a lot of people claim that a possible merger of the two companies is already baked in the share price of US Airways, I don't agree. Yes, I understand that US Airways shares appreciated by 300% in the last year, but the same can be also said about the company's earnings. Currently, analysts believe that a share of US Airways should be worth between $14 and $21 whereas the company's share price is $12.83 as of Friday. Basically, even the most bearish analysts think that the company is undervalued. The average target price for the company is $16 per share.
The company is expected to earn $2.64 this year, $2.94 next year and $3.78 in 2014. These numbers don't take a possible merger into account. From a value standpoint, the company's current cash reserve of $2.44 billion shadows its market cap of $2.08 billion. Of course, the company also has a lot of debt ($4.1 billion to be exact), but US Airways currently earns more than enough income to service this debt without any trouble. It looks like the company will enjoy a low P/E value for a long time, which is becoming typical for the airline stocks. People seem to be afraid of the prevalent bankruptcies in the industry.
In the short term, I am bullish for US Airways regardless of merger situation. In the long term, I will continue to be bullish for the company as long as the merged company isn't run by Tim Horton. If American Airlines emerges from the bankruptcy as a standalone company and offers to buy US Airways, just sell your shares and move on. In that case, I don't see US Airways being sold for a price cheaper than $20 per share though.
Currently, my breakeven price for US Airways is around $11 per share.
Disclosure: I am long LCC.