American Airlines To DOJ: Why Did You Approve Other Mergers?

Sep.23.13 | About: American Airlines (AAL)

Last Friday, US Airways (LCC) and American Airlines (AAMRQ.PK) made another push for their merger as they asked the Department of Justice why it approved the previous mergers, such as the merger between Delta Airlines (NYSE:DAL) and Northwest Airlines or the merger between United Airlines and Continental Airlines. The two companies asked the Department of Justice to share documents regarding the approved mergers in order to study why and how they obtained approval. The Department of Justice will probably provide the airline companies with the documents; however, this might take a while.

Since the early 2000s, the airline companies have been consolidating in order to cut costs and increase their efficiency. The airline companies have to struggle with pension costs, unions, volatile oil prices, soft growth of demand, and aging aircraft. Because of the many issues faced by the airline companies, these companies often post losses and they are pushed into bankruptcy from time to time.

In 2002, US Airways declared bankruptcy. Only four months later, United Airlines became bankrupt, followed by Air Canada, Flash Airlines, Aloha Airlines, Northwest Airlines, Delta Airlines, Maxjet Airlines, Skybus Airlines, Frontier Airlines, Mexicana, American Airlines and Pinnacle Airlines in the following years. Since 2000, there have been 22 airline bankruptcies with some companies declaring two bankruptcies within a few years (i.e., US Airways in 2002 and 2004, Aloha Airlines in 2004 and 2008). During the recession of 2008 and 2009, airline companies around the world posted a combined loss of $30 billion. This year, the industry is expected to post a profit of nearly $10 billion; however, the huge losses incurred during the recession still haunt many airline companies in the shape of heavy debt and concerns of future losses. Airline companies realize that the best way of minimizing the chances of dying in a recession is to become as big as possible. In the past years, the Department of Justice approved several airline mergers; however it argues that the merger of American Airlines and US Airways is different from the other mergers it has already approved.

The documents requested by US Airways and American Airlines from the Department of Justice include past studies, forecasts and analyses that helped the government agency make a decision of approving the past mergers while denying this merger. Basically, the airline companies are kindly requesting the Department of Justice to "tell them how this merger is any different than the other mergers it has already approved."

While the government argues that the merger will reduce the competition and hurt the consumers by giving the new airline too much power, the airliners involved in the case argue that they need to have the merger approved in order for them to be able to compete with much larger airlines such as United Airlines and Delta Airlines. The US Airways and American Airlines argue that if the merger doesn't get approved, they will not be able to compete with the larger airlines and this will actually serve to reduce the competition rather than increasing it.

A couple weeks ago, a federal judge approved the business plan of American Airlines so that it can emerge from bankruptcy. Last year, American Airlines attempted to come up with an approvable business plan; however, after asking extension after extension, it realized that the only viable plan for its survival was to merge with US Airways. Those who have read my articles last year will remember that the management of American Airlines was pretty stubborn about how the company should emerge from the bankruptcy as a standalone company. At the end of the day, it was determined that if American Airlines emerged as a standalone company, it would just go back to bankruptcy in a matter of time. This is why the bankruptcy court did not approve the business plan of American Airlines until it involved a merger with US Airways. This approval probably will not play a role in securing an approval for the merger. Approval for emerging from bankruptcy and approval for merger are two separate items that are being addressed by two different judges. On the other hand, if the merger doesn't get approval, American Airlines will have to go back to the drawing board and create a viable business plan in order to gain another approval from the bankruptcy court. The current approval of the bankruptcy court is contingent on approval of the merger.

I've been covering this merger for more than a year. A couple weeks ago, when the merger was challenged by the Department of Justice, the share price of US Airways plunged from nearly $19 to $15. As I said many times, US Airways is very cheap regardless of the merger. This is why the stock price of the company has recovered back to where it was before the announcement of Department of Justice. The story is a little different for American Airlines. If the merger doesn't happen, the shareholders of American Airlines will see their shares getting cancelled. This is why American Airlines is a much bigger risk than US Airways. In November, this drama will come to an end and we will see how investors of each company fare after the decision.

Disclosure: I am long LCC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.