A New Era In The Airline Industry: US Airways Group Inc. (LCC), Delta Air Lines Inc. (DAL) and More

Page 1 of 2

US Airways Group Inc (LCC)Anyone who has been investing for a while knows that airlines are a tough business. For decades overcapacity and price competition have been destroying shareholder value. Not even great investors such as Carl Icahn have managed to make money in this industry. Nowadays airlines keep on losing money most of the time, but the economics in the industry are ameliorating fast thanks to the ongoing cut in seat availability (capacity) and a strong consolidation process. The last mega deal to be announced was the one between AMR, the bankrupt parent of American Airlines, and US Airways Group, Inc. (NYSE:LCC).

The deal promises to reshape the US airline industry and create the world’s second largest airline by revenues. The deal between these two airline giants is the last step in the the US airline industry consolidation that should be the cornerstone to create the healthy competitive environment airlines have been expecting for decades. Now there will be three $40 billion revenue companies: American, United Continental Holdings Inc (NYSE:UAL), and Delta Air Lines, Inc. (NYSE:DAL).

All of the above being said, companies are not always easy to merge. The merger between United Airlines and Continental Airlines in 2010 is still causing headaches for investors. Different problems coming from diverse IT systems to unions could make the lives of the management behind a merger pretty far from heaven. Despite the expected bumps ahead for airlines, merging still does make sense.

The merger between Delta and Northwest Airlines in 2008 is a great example of this. The company has been ameliorating its numbers since the all-stock merger took place. Nowadays Delta can show reasonable results to its shareholders, as it has one of the most efficient cost structures in the industry. As an example, in 4Q 2012 Delta could show investors that its passenger revenue per available seat mile, which is the key measure of airlines unit revenues, was up by 4.3%. I bet the new merged company will also finally succeed. American will provide US Airways with a much-need international network, and US Airways shall provide a very efficient East Coast hub. As a matter of fact, the two companies (whose route networks almost don’t overlap) plan to keep operating all their present hubs and serving every destination they currently travel to.

The combined company will not only help to reshape the competitive environment, but it will also produce nearly $1 billion in synergies. Of course the merger would not have been possible without the AMR restructuring, which cut costs sharply. Actually, American’s costly structure has been the main cause for the company’s low gross margins. Let’s just take a look at the following: while American made a $107 million operating profit on $24.9 billion revenues for 2012, (although it reported a $1.88 billion net loss after restructuring costs), US Airways reported $637 million net income for 2012 on $13.8 billion revenues. The combined company’s margins should resemble more those at US Airways than those at the old American. According to analysts, the new company will generate over $6 billion in operating cash flows, assuming just half the expected synergies, and will carry around $15 billion of net debt.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

On the Move: The 10 Fastest Growing Businesses in 2015

Fast Money: The 10 Highest Paying Fast Food Restaurants

Mixing It Up: The 14 Best Music Mashups of 2014

Rito Pls Buff: The 10 Least Played Champions in LoL Season 4

10 Covers of Popular Songs that are Better than the Originals

Must See TV: The 9 Most Anticipated Shows of 2015

The 15 Biggest Box Office Bombs of All Time

10 Things The World Can’t Stand About Americans

Picture Perfect: The 6 Smartphones with the Best Cameras

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!