The Latest Developments On US Airways-American Airlines Merger

Includes: AAL, DAL, UAL
by: Jacob Steinberg

On Friday, the trial between US Airways (LCC), American Airlines (AAMRQ.PK) and the Department of Justice was scheduled to occur on November 25. The Department of Justice was hoping to get a date around March of 2014 whereas the airlines were looking for a date around October of this year. It turns out that waiting until next march is detrimental for the two companies who are suffering from uncertainties and increased legal costs and next October didn't present a long enough time for both sides to collect their evidence and make their case.

Since the judge's date was closer to the date requested by the airlines than the date requested by the Department of Justice, one might be tempted to think that the judge is more likely than not to approve the merger; however, I wouldn't jump to such a conclusion without any solid evidence. The trial will be "fast-track" where the US District Judge Colleen Kollar-Kotelly will make a quick decision after listening to both sides rather than dragging the trial for years. The trial is expected to last about 10 days and each side is expected to bring six witnesses to support their case.

Meanwhile, Judge Sean H. Lane, who oversees the bankruptcy case of American Airlines, announced that he was leaning towards approving the company's plan to emerge from the bankruptcy. The company's submitted plan includes a merger between American Airlines and US Airways. Judge Sean Lane won't really have a say in the case of merger itself; however, his approval is very likely to depend on approval of a merger. In other words, if American Airlines can't get an approval, it might be time for the company to go back to the drawing board and devise a new feasible and approvable business plan from scratch. The company already tried to do that for months; however, it had to give up and seek a merger with US Airways after it couldn't come up with a feasible business plan that would gain approval from the bankruptcy court. Without the merger, the company's very existence might be in danger.

The Justice Department thinks that allowing the two airlines to merge would result in higher ticket prices for the consumers because the new company would be large enough to have a significant pricing power. Also, the two airlines compete in more than 1,000 routes where the competition would be reduced significantly in the event of a merger. Finally, the merged airlines would take nearly 70% of all landing and taking-off spots in Ronald Reagan Washington National Airport, the largest airport in the nation's capital.

The airlines argue that they need to merge in order to compete with the much bigger airlines United Airlines (NASDAQ:UAL) and Delta Airlines (NYSE:DAL). The airlines also claim that they are ready to make any necessary concessions in order to make the merger happen. At first, the Department of Justice claimed that it doesn't want any concessions and it is looking at killing the merger no matter what; however, on Friday, it said that it hinted that it was open for concessions.

Rich Parker, a lawyer for US Airways said that the government offered "complaints rather than counter arguments" when the airline companies offered some concessions in order to reach a settlement outside of the court. On September 30th, the lawyers from both sides will be getting together one last time before the trial in order to discuss the final details. While attempting a settlement is not in the agenda, it might enter in the agenda as the negotiations continue on.

If the merger gets approved, US Airlines can easily pass $25 per share and American Airlines can move closer to $7 per share. If the merger fails, US Airlines should still trade around $18-19 at the least, given the company's P/E ratio of 5 and cash reserves of $3.62 billion that exceed the company's market value of $3.10 billion. Again, if the merger fails, American Airlines will be worth pretty much nothing because the shares will get cancelled just like General Motors (NYSE:GM) shares did in 2009.

The investors that believe that the merger is more likely to get approved can put their money in US Airways which is a much safer bet than American Airlines regardless of whether the merger gets approved or not.

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.