Each day, the likelihood of a US Airways (LCC)/American Airlines (AAMRQ.PK) merger keeps improving. After Alaska Airlines (ALK), JetBlue Airlines (JBLU) also declared that it has no interest in pursuing a merger with the bankrupt company. This is great news for US Airlines, as the company has fewer competitors to worry about. Clearly, US Airlines continues to be the strongest and most willing candidate for a possible merger with American Airlines.
Just a few weeks ago, CEO of American Airlines Tom Horton made it seem as if he holds all the cards in the merger, but that doesn't appear to be the case anymore. He practically holds no cards at the moment, as the employees, unions, bondholders and many other stakeholders in the story seems to support the idea of a merger with US Airways where the new company is run by Doug Parker's team. As Horton's options keep running out and he gets cornered, he may end up making a decision regarding the merger within a matter of weeks.
US Airways is the only company that openly declared interest in the merger. Currently, American Airlines is the fourth largest airline in the U.S. (by volume). US Airlines is the fifth biggest airline in the U.S., and the combination of the two companies would result in the largest airline in the country. The largest airlines in the country are Delta Airlines (DAL), United Airlines (UAL), and Southwest Airlines (LUV). These three companies are not interested in merging with American Airlines -- and antitrust agencies wouldn't even allow such a thing. The largest airline American Airlines can possibly merge with is US Airways.
If the two companies merge, the resulting company will have a lot of pricing power due to its large size, and it will be ahead of the competition in terms of volume. The resulting company will be one of the largest airlines in the world. The resulting revenue increase can easily fuel better employee contracts for the employees of both companies and more growth for the merged company. Obviously, the merger is a no-brainer and everyone -- with the exception of Horton -- seems to agree with it. Horton is worried because the merged company will be run by the CEO of US Airways and he will lose his job as a result.
Frontier Airlines and Virgin America are said to be the other airlines still in the game in terms of competing for the merger. While these companies have not openly declined interest yet, they haven't declared any interest either. The two companies are probably pursuing the merger passively rather than actively. At the end of the day, American Airlines might end up attempting to buy one or two of these airlines; however, they are not likely to make an offer to buy American Airlines. This situation also strengthens the case for a possible US Airways/American Airlines merger. American Airlines has until December to make a decision regarding the merger before the court steps in and makes a decision including all the stakeholders, which would put US Airways in the picture as the company holds bonds of American Airlines.
On a side note, a number of analysts updated their target prices for the US Airways. Now the average target price for the company is $16.50, with the maximum target price being $21. Earlier, the average target price was $18 for the company. The reduced average target price could be due to the recent fall in the share price as it went from $14 to $10. For the last few days, the share price of the company seems to be recovering. As oil prices went up, some analysts updated their earnings estimates for the company as well. Now the analysts expect the company to earn $2.96 this year and $3.62 next year. In a perfect world, US Airways would have a P/E ratio of 10, giving it a share price of $29.6 this year and $36.20 next year. However, due to the volatile nature of airline stocks, it looks as if airline companies will enjoy exceptionally low P/E ratios for the time being.
Disclosure: I am long LCC.