Will the Fourth Time be the Charm for American Airlines?
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The merger of American Airlines with US Airways (NYSE: LCC) is not the first for the Texas-based carrier.
American has merged with other airlines three times since 1986 in the hopes of delivering more value to its shareholders. The culmination was the bankruptcy filing of American Airlines in November 2011. Based on the rise in US Airways' stock since that unfortunate event for American, the stock market has been anticipating a profitable union between the two. Foolish investors should not forget what happened before as they decide to go long or short on the recently announced merger between American Airlines and US Airways.
In 1986, American Airlines bought AirCal to expand its operations on the West Coast. But by 1993, American Airlines was withdrawing. Another Texas-based carrier, Southwest Airlines (NYSE: LUV), moved in and dominated the space. From 1989 to 1994, Southwest Airlines expanded from four California airports to nine. California is a strong area for United Airlines (NYSE: UAL) and Delta Air Lines (NYSE: LCC) as well.
A little over a decade later, in 1998, American tried again to expand on the West Coast with the purchase of Reno Air. The denouement was the same as the AirCal debacle. Southwest, United, and Delta Air Lines were still strong on the West Coast. JetBlue Airways (NASDAQ: JBLU) was formed in 1999 and expanded to operate from such California airports as Burbank, Long Beach, Los Angeles, Oakland, and Sacramento, among others. As with AirCal, American reduced or eliminated the West Coast assets picked up from Reno Air.
The new millennium witnessed yet another attempt by American Airlines to grow as it acquired the assets of Trans World Airline in 2001. Rather than the West Coast, American was hoping that a new hub in St. Louis would facilitate its ascending in status as a major east-west carrier in the United States. It was pretty much the same story as the other two transactions, but with the twist of American Airlines filing for bankruptcy in November 2011.
US Airways has had its share of bankruptcies, and failed mergers and acquisitions, too.
In 1989, then-USAir merged with Piedmont Airlines, which operated on the East Coast. It was the largest airline merger in history at that point. Needless to say, it too was promoted as being a great leap forward for the wonders of synergies and consolidation, just as with the proposed union with American Airlines is today. Since that time, US Airways has filed for bankruptcy twice. Even more foreboding, according to its CEO Doug Parker, US Airways cannot hope to survive without merging with American Airlines. From a USA Today interview with Doug Parker, "US Airways; CEO Parker presses case for merger with American," it was reported that, "He told USA TODAY's Editorial Board on Wednesday that the only way American — and US Airways, for that matter — can survive is to combine to compete with giants United and Delta, the nation's biggest carriers, which have gone through mergers of their own in the last four years."
There are the usual hopes for any merger: consolidation, synergy, etc. But consolidation in recent years involving Southwest, Delta Air Lines, United, and Republic Airways, among others, did not keep American out of bankruptcy court. In addition, discount carriers such as Southwest, JetBlue, and Spirit Airlines have become stronger on many lucrative routes, accounting for 37% of all domestic travel. As for rising ticket prices as a result of industry consolidation, domestic fares have fallen about 15% since 2000.
Writing in a March 2012 op-ed in USA Today, Phil Longman, a senior research fellow with The New American Foundation, called for the government to "...re-regulate airlines to ensure solvency..." as the "...industry's problems are structural and deepening..." Moreover, costs will certainly be high to assimilate the operations of US Airways and American Airlines. The debt load after a US Airways-American Airlines merger should be staggering for the surviving entity.
This debt factor also weighs down the investment prospects of the entire airline sector, except for Spirit Airlines. Southwest Airlines is clean with a debt-to-equity ratio of 0.45, even after the AirTran purchase. The merger with Continental and picking up of the routes to England from Virgin Atlantic has Delta Air Lines' debt-to-equity ratio at a jaw-dropping 11.86. For United-Continental, the costs of the merger and other matters has the debt-to-equity ratio at 6.64. For JetBlu, it is 1.54. Pre-merger, US Airways is already larded up with a 6.1 debt-to-equity ratio.
The table below shows that even during a period of consolidation in the airlines industry, sales and earnings-per-share growth has been very low, while the debt load has been sizeable.
Source: Finviz and YCharts
Should Foolish investors expect a soaring share price for the long term now that US Airways will indeed join together with American Airlines? Based on the history of both airlines and the incredibly competitive marketplace, it would appear that the price taking off for US Airways from under $4.50 in November 2011 to around $14.30 today will have been the greatest gains for shareholders. With its earnings-per-share growth up 142.14% this year and the AirTran acquisition assimilated, Southwest Airlines should have the best long term prospects.
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