Will The Government Shutdown Affect The US Airways-American Airlines Merger?

| About: American Airlines (AAL)

Lately, the merger between US Airways (LCC) and American Airlines (AAMRQ.PK) has been on the news, as the court date draws closer and closer. As the US government is currently in the middle of a partial shutdown, the government's fighting power might be diminished at the court, making it easier for the airlines to win the case. In fact, the Department of Justice is actually concerned about this and it has contacted the court in order to delay things until the government is back in business.

The federal court rejected the request of the Department of Justice because delaying the lawsuit would hurt the business interest of American Airlines and US Airways. Time is very crucial for American Airlines which is in the process of emerging from a bankruptcy it entered a couple years ago. The ongoing uncertainty hurts both companies as legal fees pile up and employees are disturbed with the fact that they don't know where their companies are headed to.

The court will start on November 25th and it is estimated to last about 2 weeks before a decision is made. The Department of Justice was hoping to fight its case with a large team of lawyers, witnesses and other elements; however, the government shutdown will result in some cutbacks, and this will definitely strengthen the hands of the airline companies involved.

As the Democrats and Republicans are having so much trouble finding a common ground, it may take weeks before the government's shutdown is over. Each day spent in shutdown will hurt the chances of government winning the case against the airlines as the Justice Department has the obligation to prove that the merger will hurt consumers by diminishing competition. American Airlines and US Airways argue that the merger will actually result in an increased competition because it will result in a third major airline besides United Airlines and Delta Airlines. Currently, due to their massive sizes, these two airlines face very little competition and they enjoy a lot of pricing power.

Meanwhile, the state of Texas dropped out of the lawsuit after getting some concessions from the airline companies. Currently, American Airlines is based in Fort Worth, Texas and the merged company also plans to be based in the same location. As this move would increase the economic activity in the state, the merger will actually benefit Texas greatly. This is why a lot of people were deeply surprised when the state of Texas decided to join the lawsuit to block the merger. According to the settlement between the two airline companies and the state of Texas, in addition to keeping its headquarters in Texas, the merged airline will continue to offer daily flights to more than 20 cities in the state.

The settlement between Texas and the two airline companies tells me that the airline companies are actively talking to the states involved in the lawsuit behind the scenes in order to secure deals with them outside of a court room.

Some states will prove difficult to settle with though. For example, Arizona will continue to be a major part of the lawsuit as it is concerned about losing US Airways to Texas. Currently, US Airways is headquartered in Tempe, Arizona and, if approved, the merger would move thousands of jobs from the state to Texas. US Airways also enjoys a major hub at Sky Harbor International Airport in Phoenix, Arizona.

Interestingly enough, the government was looking for a court date around mid-March even before the shutdown was on the table. When the judge set the court at a date closer to what the airliners wanted it to be, a lot of people took it as a hint that the airliners were more likely to win the case. The government argued that the court date was not far enough to allow the government to collect evidence and make a strong case. The judge rejected the government's request saying that the two airline companies need a quick decision so that they can move on and limit their damage since American Airlines is trying to emerge from a bankruptcy.

In August, when the government announced that it would pursue a lawsuit in order to block the merger, the share price of US Airways fell from $19s to $15s. Back then, I wrote a few articles covering the stock and argued that the company's share price was too cheap to ignore and that it would recover regardless of whether the merger gained approval or not. After a month or so, US Airways is trading for $20.50 per share. The company is still pretty cheap with a trailing P/E ratio of 7 and a forward P/E ratio of 6, especially considering the fact that it currently has more cash than its market value.

Next month will be very busy and interesting for both airline companies. The government shutdown will certainly weaken the government's hand in the case, but this doesn't mean that the case will be easy to win for the airline companies. There is still a lot of work that needs to be done in both sides. Prior to the government shutdown, I would have seen the chances of merger getting approved at %50, but it looks more like 60-70% at the moment. Even if the merger doesn't get approved, the investors of US Airways will still be fine as the company's valuation continues to look attractive. On the other hand, the investors of American Airlines are looking at a binary event where they will either be very happy or very disappointed depending on the court's 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.