After jumping nearly 200%, the share price of US Airways Group, Inc. (LCC) started losing momentum and has been experiencing a sharp decline in the past several weeks. Of course, the decline has a lot to do with the CEO of American Airlines (AAMRQ.PK) Tom Horton and his comments regarding the merger. What's the latest update on US Airways and where is it likely to be headed from here? This article will make an attempt to answer these two questions.
Recently, American Antitrust Institute and Business Travel Coalition conducted a study and found out that a possible merger of US Airways and American Airlines would be detrimental to consumers as the merger would create a very powerful airline with a lot of control over flight routes and ticket prices. American Airlines is the 4th biggest and US Airways the 5th biggest airline in the country, and the two companies have a combined market share of 20%, which is enough to have some control over different aspects of ticket pricing.
According to the study, the top 5 airline companies have a combined market share of 70% and mergers at this level would hurt not only consumers, but also smaller airline companies. The two agencies probably want to draw the attention of Department of Justice to the matter so that the merger of the two companies could be stopped. The president of US Airways Scott Kirby dismissed the conclusion of the report and American Airlines refused to comment. Mr. Kirby believes that the merger would be good for consumers, as it would create serious competition for Delta (NYSE:DAL) and United Airlines (NYSE:UAL) - which don't face a serious challenge.
The court gave American Airlines until December to present a workable plan for the company to be able to emerge from the bankruptcy. The company could emerge from the bankruptcy as a standalone company, acquire another company, or be acquired by another company. In order for the company to get out of the bankruptcy without being acquired by another company, it first has to deal with some internal issues, such as the labor contracts.
On Wednesday, American Airlines failed to reach an agreement with its pilots regarding the labor contracts. If American Airlines can't come up with a feasible business plan by December, the court may grant this right to another stakeholder, such as US Airways, as US Airways happens to be one of the bondholders of American Airlines. Investors of US Airways were cheering on Wednesday regarding the failure of American Airlines to agree with its pilots. The company's stock price rallied nearly 10% on the news. If American Airlines can't agree with its pilots on a workable plan, the chances of the company presenting a good business plan to the court by December will become increasingly difficult. While the pilots of the company didn't agree on a new contract, the mechanics barely agreed with 50.25% of the members voting for and 49.75% against.
There is a lot of friction between management and the employees of American Airlines. A few years ago, the company's employees took large salary cuts, while the management team received huge bonuses, and many of the union members at American Airlines would rather have Doug Parker as their CEO than Tom Horton.
On a positive note for investors of US Airways, the company has reached a tentative agreement with its flight attendants. This had been one of the company's main headaches for a while and I am sure the company's CEO Doug Parker must be very relieved to have reached an agreement with one of the largest employee groups of the company. The agreement will cover 6,800 of the company's flight attendants. This will allow the flight attendants to have a contract prior to any possible mergers and the conditions of the contract will not be changeable if and when the merger is completed.
Because American Airlines couldn't reach an agreement with its pilots, the court will have to make a decision regarding the matter. For American Airlines, time is running out, as the company has about 4 months to come up with a feasible business plan. US Airways is waiting on the sidelines for an opportunity to acquire American Airlines and this opportunity might present itself around December.
Both Doug Parker and Tom Horton know that the two companies have to merge in order to be able to compete with Delta Airlines and United Airlines. Also, they both agree that the merger company should take the name, logo and headquarters of American Airlines, rather than US Airways. The biggest disagreement between the two CEOs is regarding who the boss of the new company will be. If American Airlines ends up buying US Airways, Tom Horton is likely to run the two companies. If US Airways ends up buying American Airlines, Doug Parker is going to be the CEO of the new company. This is where the disagreement comes in. Both individuals will want to hold on to power for as long as they can.
When the idea of a merger between US Airways and American Airlines first came up, the investors of US Airways thought it was a sure thing. As time went by, they started to see that Tom Horton wouldn't give his company up without a fight. The recent sell-off signifies that investors of US Airways are very cautious about the company's future; however, Wednesday's rally also suggests that any hint of progress towards the merger will be bullish for the company. My personal opinion is that US Airways will do very well, regardless of whether the merger happens. The company is having one of the most profitable years in its history and analysts are very optimistic about the future of the company in the medium term.
Disclosure: I am long LCC.