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US Airways finds a tailwind

by Lou Whiteman  |  Published January 25, 2013 at 3:35 PM
Conventional wisdom holds that US Airways Group Inc., the runt of the litter among legacy U.S. airlines, needs a merger with American Airlines Inc. to secure its long-term future. But Tempe, Ariz.-based US Air has been firing on all cylinders of late, a fact American creditors and management should keep in mind when determining whether to do a deal.

US Airways began courting AMR Corp. soon after that company filed for Chapter 11 protection in November 2011, seeking to create an entity with the heft to rival industry titans United Continental Holdings Inc. and Delta Air Lines Inc. US Airways generates just $13 billion in annual sales, compared to about $37 billion apiece from those larger competitors, and lacks the international route network to compete for corporate sales.

People familiar with the situation say AMR officials who oppose a deal have used US Airways' diminutive position to argue against a merger, suggesting that US Air needs a deal more than American does and that their airline would be better off emerging from Chapter 11 on its own and then negotiating a deal later at more favorable terms. But that argument could be losing altitude.

US Airways on Wednesday, Jan. 23, reported earnings per share of 26 cents in the fourth quarter of 2012, besting the 19 cent consensus, thanks to higher fares and lower expenses. And the company said it expects its 2013 results to come in ahead of expectations.

"Although many investors are focused on the pending merger negotiations between [US Airways] and American Airlines, going somewhat unnoticed is that [US Airways] continues to generate some of the most consistent EPS growth among the major airlines," Sterne Agee Group Inc. analyst Jeffrey A. Kauffman wrote.

Though one quarter does not make a business, analysts say that US Airways has carved out a profitable niche. The company in recent years has been ruthless in shutting down unprofitable operations and focusing instead on cities and routes where it could be profitable. For example, last year it surrendered much of its New York presence to Delta in exchange for added heft at its Washington stronghold.

The airline also does not face the significant wage rate increases that some of its peers must deal with in the near future.

"We've long bristled at investor suggestions that [US Airways'] industry role is neutered (a kinder term than what some use) in the absence of consolidation," JPMorgan Chase & Co. analyst Jamie Baker wrote following the earnings announcement. "With 2012 margins just shy of Delta while topping those of Southwest [Airlines Co.] and United, we find investor stand-alone pessimism to be significantly misplaced."

Given the turbulent history of airline mergers, there are plenty of reasons for American owners to oppose further consolidation. But if they are hoping to extract a better deal from a weakened US Airways down the line, those owners could end up disappointed.

Tags: American Airlines Inc. | AMR Corp. | Chapter 11 | Delta Air Lines Inc. | United Continental Holdings Inc. | US Airways Group Inc.

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