3 Reasons To Nix This Merger
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
According to reports, a deal between US Airways (NYSE: LCC) and American Airlines appears imminent. Here are three reasons the shareholders of US Airways should hope it does not transpire.
First, things are going too well for US Airways with the present operations to risk a major disruption as a merger or acquisition. It just posted a record annual profit. Fourth quarter revenues were higher. Passenger traffic increased by 3.8%, and the load factor, the number of seats filled, rose by 1.4%. Passenger revenue per seat mile also jumped by 2.2%. About these results, the Chief Executive Officer of US Airways, Doug Parker, stated, “We couldn’t be happier with the performance of US Airways in 2012.”
Wall Street agrees with Parker, as the share price has soared 133.54% in the past year. Why risk such a great performance with a merger when things are going so well with the present way of doing business?
Second, mergers generally do not work. Anand Chokkavelu of Motley Fool noted in his piece, "The 100 Things I've Learned in Investing," about these transactions: "Mergers and acquisitions are overrated. Somewhere between 50% and 85% of mergers fail to boost value. The frequency of achieving promised "synergies" should be filed somewhere between unicorns and no-hitters."
The airline industry has a particularly sorry track record in mergers and acquisitions. Charlie Munger, partner of Warren Buffett, once observed that "The net amount of money that's been made by the shareholders of airlines since Kitty Hawk is now a negative figure." That is why American Airlines had to file for bankruptcy as no one wanted to buy it. Republic Airways has been trying for over a year to sell Frontier Airlines, with no takers. Delta Air Lines (NYSE: DAL) grounded Comair, its commuter division, as it could not be sold.
American Airlines filed for bankruptcy in November 2011. Mergers are tenuous enough: combining with a bankruptcy entity is particularly dubious. As US Airways has filed for bankruptcy twice, this is hardly a panacea for an air carrier. Every legacy carrier in the United States has filed for bankruptcy.
It is also worthy of note that US Airways is the only entity to take a serious interest in American Airlines. There has certainly not been a contest like there was between Republic Airways and Southwest Airlines for Frontier back in 2009. That should tell something about the appeal of American Airlines as a merger partner or acquisition target.
Third, there is a better way. Delta Air Lines just bought 49% of Virgin Atlantic from Singapore Airlines for $360 million. Singapore Airlines paid $965 million for its Virgin Atlantic investment holding in 1999. Southwest Airlines has been very adept at this manner of expanding, profiting from the mistakes of others. From the bankrupt ATA Airlines, Southwest acquired 14 landing slots at LaGuardia Airport, yielding an initial presence in the lucrative New York City market. US Airways should be looking to expand by picking up the best assets from other carriers, rather than taking on an entire bankrupt entity like American Airlines.
US Airways should also heed the advice of Laura Glading, President of the Association of Professional Flight Attendants, who warned that, "American needs to merge. We think American is going to be in jeopardy if it manages to emerge (from bankruptcy) as a standalone." That could be a major factor why there are no other parties reported to be interested in American Airlines.
If there are doubts that American could not make it on its own, US Airways should take a pass as it will very likely have to take on substantial debt to finance any transaction. Foolish investors should avoid US Airways stock if it does acquire American Airlines in a deal that requires increasing its debt load, already higher than the industry average of 5.36 at 6.02. US Airways will most likely rally in the short term, but the long term outlook will be negative.
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