Like the Bachelor, American Airlines is Publicly Looking for a Partner
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In the stock market version of a personal ad or starring in a reality show, American Airlines is now looking for a partner, as recently blared forth in The Wall Street Journal article, "American Airlines Opens Its Door to a Merger."
As with many reality shows, the journey of American Airlines to this destination has not been one for those who cannot handle public setbacks or unwaivering scrutiny. Before American Airlines became the last legacy carrier in the United States to file for bankruptcy, it tried to sell its regional airline, American Eagle, to raise cash to stay out of Delaware Chancery Court.
But there were no takers. And while there was purported interest, no one stepped forward to keep American Airlines from bankruptcy. On November 29, 2011, American Airlines filed for Chapter 11.
There is certainly no shortage of rumored suitors at this juncture. In The Wall Street Journal piece by Mike Spector, Susan Carey and Anupreeta Das, listed are Alaska Airlines (NYSE: ALK), Delta Airlines (NYSE: DAL), JetBlue (NASDAQ: JBLU), US Airways (NYSE: LCC), Virgin America and Frontier Airlines, a subsidiary of Republic Airjet (NASDAQ: RJET).
As only Chapter 11 can do, plenty of lipstick has been put on a pig. American Airlines now has $5 billion in the bank, up from $4 billion when it filed for bankruptcy. Operating income for May went into the black at $55 million, a $70 million swing from the $15 million shortfall in April. Revenue collected from each passenger mile also increased by 8.6% for American Airlines, another bullish indicator.
Of the listed potential partners, only US Airways has indicated an interest. It appears as if American Airlines is trying to create a bidding war or auction. The only problem with that is US Airways is the only one willing to wave the paddle and make a bid.
A merger with Frontier Airlines would probably be the worst possible combination. Republic Airways has been trying to sell Frontier Airlines since late last year and has found no takers. Republic Airways outbid Southwest Airlines (NYSE: LUV) for Frontier Airlines, buying it for $1.1 billion in considerations in October 2009. At present, the total market capitalization for Republic Airways is $280 million, so the acquisition of Frontier certainly did not add anything to the value of the company. Republic Airways stock jumps whenever there is mention of the sale or spin-off of Frontier Airlines; the market is making a point here.
Looking at the sordid history of airline mergers and acquisitions, it is easy to see why no other carrier stepped forward to rescue American Airlines or why only US Airways has indicated an interest now that bids are actively being sought. In the book, "Merchants of Debt," Kohlberg, Kravis & Roberts passed on the United Airlines leveraged buyout back in 1989. From the book about the advisability of investing in airlines: "If ever a business was badly suited for leveraged buyouts - veering up and down depending on fuel prices, the economic cycle and even threats of terrorism. Capital spending needs for new planes were sizable every year, and they couldn't easily be postponed just to help service debt. A high-debt airline could be vulnerable to a cash squeeze or a loss of consumer confidence."
Buying American Airlines would most likely require taking on a great deal of debt. Delta Airlines has a debt-to-equity ratio already of 11.86 due to the costs of its merger with Northwestern. The debt-to-equity ratio for Republic Airways is 5.08, so it has little chance of stepping in to finance a hook-up for American Airlines with Frontier. US Airways is also larded up, with a debt-to-equity ratio of 22.19. It appears as if the potential suitors have taken a page from the playbook of Southwest Airlines and are looking to buy cheap or not at all. That is a lesson Republic Airways learned the hard way with Frontier Airlines.
Fool blogger Jonathan Ytes does not own any of the stocks mentioned in this article. The Motley Fool owns shares of Southwest Airlines. Motley Fool newsletter services recommend Southwest Airlines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.