Federal regulators have recently thrown up roadblocks to the planned merger of US Airways Group Inc (NYSE:LCC) and AMR Corporation (OTCMKTS:AAMRQ), the parent company of American Airlines. The Department of Justice is worried that allowing two of the top five U.S. carriers to merge will hurt competition. DOJ lawyers also argue that the merger is unnecessary because AMR Corporation (OTCMKTS:AAMRQ) and US Airways Group Inc (NYSE:LCC) can be successful independently.
American Airlines and US Airways planes tail-to-tail. Photo: AMR.
Executives at both companies have staunchly denied the DOJ allegations. They claim that the merger will provide the best restructuring option for AMR Corporation (OTCMKTS:AAMRQ) and that it will improve competition. AMR and US Airways Group Inc (NYSE:LCC) leaders claim that by combining their complementary networks, they will be better able to compete with Delta Air Lines, Inc. (NYSE:DAL), United Continental Holdings Inc (NYSE:UAL) and Southwest Airlines Co. (NYSE:LUV): all the products of recent airline mergers.
Unfortunately, AMR Corporation (OTCMKTS:AAMRQ) and US Airways Group Inc (NYSE:LCC) executives have showed a distinct tendency to incriminate themselves. It’s becoming increasingly clear that an AMR Corporation (OTCMKTS:AAMRQ)-US Airways Group Inc (NYSE:LCC) combination will earn higher profits than would be consistent with vibrant competition. As a result, the DOJ — which is already taking a hard-line stance toward the merger attempt — is likely to become even more strongly opposed to the merger.
Full recovery
This week, AMR Corporation (OTCMKTS:AAMRQ) disclosed that it earned a record profit of $349 million before reorganization costs on revenue of $2.48 billion in July. That implies an adjusted profit margin of 14.1% and an adjusted operating margin of 16.6%. These figures are very high by the standards of the airline industry.
By contrast, Delta Air Lines, Inc. (NYSE:DAL)– which has been the top-performing legacy carrier recently — last month projected an 11%-13% operating margin for Q3. While that forecast also includes the seasonally weaker month of September, it’s still unlikely that Delta Air Lines, Inc. (NYSE:DAL) earned a higher profit margin than AMR last month.
In other words, despite having less scale than Delta Air Lines, Inc. (NYSE:DAL), AMR is already earning comparable or higher margins. That undermines the argument that AMR needs to merge with another carrier to remain viable.
Self-incrimination
Because of its ongoing bankruptcy case, AMR has to report results monthly. Thus, while AMR’s strong July results appear to bolster the DOJ’s case, releasing them was unavoidable. However, CEO Tom Horton aggravated matters with a triumphant memo to employees, in which he described AMR’s restructuring as one of the most successful in aviation history.
