In my earlier articles covering the merger between US Airways (LCC) and American Airlines (AAMRQ.PK), I talked about how US Airways would be fine regardless of the merger even though the investors of American Airlines might hurt badly if the merger doesn't go through. In this article, I will be discussing some of the things US Airways could do if the merger fell through completely.
So, what can US Airways do to add value to its shareholders if the merger fails completely? The first option that comes to my mind is another merger. Sure, American Airlines might be too large for US Airways to merge with; however, there are several smaller airlines which US Airways could safely merge with. Some of the airlines that come to mind are: SkyWest (SKYW), Hawaiian Airlines (HA), Republic Airways (RJET), Spirit Airlines (SAVE), Alaska Air (ALK) and JetBlue (JBLU). Joining forces with any of these airlines would make US Airways large enough to compete, but not too big to gain regulatory approval.
If we look at the list of the largest airlines in the US by volume, we see Delta Airlines with 164 million passengers on the top of the list. Delta Airlines is followed by United Airlines with 140 million passengers, Southwest Airlines with 134 million passengers, American Airlines with 107 million passengers and US Airways with 62 million passengers. Notice that a combination of American Airlines and US Airways would have carried a total of 169 million passengers, effectively becoming the largest airline in the country by volume. In comparison, JetBlue was the next largest airline with only 29 million passengers. Combining JetBlue and US Airways would give us a sum of 91 million passengers, which would make the new airline big enough to be efficient, but not too big to scare regulators off. The volume of Alaska Airlines was 26 million, followed by WestJet with 17 million, Spirit Airlines with 10 million and Hawaiian Airlines with 9 million. Of course, combining two airlines is not as simple as this. For example, if two airlines have redundant routes, they might get rid of the redundancies, making the total volume lower than a simple addition of volumes of two airlines.
Even if US Airways doesn't want to merge with anyone, it could still add a lot of value to its investors in many different ways. For example, US Airways currently has $3.62 billion in its balance sheet which is more than enough to buy all the outstanding shares of the company. The company's current market value is around $3.03 billion, which would be easily covered with the cash at hand. Of course, it would make little sense for the company to spend its cash balance to go private; however, the company could always buyback a large chunk of its shares in the market. Given that 26% of the US Airways shares are shorted (the true number is probably much higher since the last update on the "short statistics" was prior to the DOJ announcement), if the company announced a stock buyback of $250 million or so, this would scare the shorts off and trigger a short squeeze, which would add a lot of value to the existing investors of the company.
The company could also add value to its shareholders by issuing dividends. Last year, US Airways earned $3.07 per share and it earned $3.44 per share in the last 4 quarters. The company is expected to earn $3.15 this year, $2.93 next year and $3.85 in the year after. If we take the average of these three years, we get $3.31 per share. If the company were to spend 25% of its earnings on dividends, it would be looking at 83 cents per share in dividend rate and 5.25% in dividend yield. This yield would surely attract a lot of dividend investors (and the dividend-reinvestment would ensure that long-term investors are getting their hands on more and more shares every year rather than shorters or traders).
Furthermore, US Airways could spend its cash to pay-off a large chunk of its existing debt. While most of the company's debt is not expiring anytime soon, it owes $5.85 billion of debt. Last year, the company spent $227 million to service its debt. Paying off this debt earlier, rather than later, would help the company's finances greatly. If a company can keep more of the money it earns, it can present better value to the shareholders.
Finally, US Airways could put some of its cash into use by acquiring more routes, assets and investing to growing itself organically instead of through a merger. This would also add a lot of value to the shareholders. Currently, US Airways has very limited exposure to the markets outside of the US, and it could seek growth in some international markets through partnerships and some investments.
No matter how one cuts the data, US Airways is grossly undervalued. The company trades for a value that's lower than its cash holdings (and only 5 times its earnings). This is why I am confident in the company's prospects regardless of the merger. I don't know if the merger will go through or fall through; however, I know that the investors of US Airways will be fine because the company is very cheap as it is and the downside is pretty limited.
US Airways has a bright future and it's a strong investment. As for American Airlines, the company's investors will get paid only in the event of a merger. If American Airlines emerges from the bankruptcy as a standalone company, it is very unlikely that the shareholders will get any money for their shares. Today, the share price of American Airlines was up by more than 8% which shows me that the shareholders of the company still have a lot of faith in the merger.