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US Airways Group Inc (LCC), AMR Corporation (AAMRQ): It’s Not Over Yet

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After the Department of Justice challenged the merger between US Airways Group Inc (NYSE:LCC) and American Airlines parent AMR Corporation (OTCMKTS:AAMRQ), shares of both airlines sold off in a spectacular fall that had both carriers down by double-digit amounts. With a merger, the new American Airlines Group was expected to be highly profitable, benefiting current shareholders of both airlines. However, in light of this recent sell-off, shares of US Airways Group Inc (NYSE:LCC) look attractive even if this merger ultimately fails.

US Airways Group Inc (NYSE:LCC)

Earnings power
US Airways Group Inc (NYSE:LCC) may be the smallest of the remaining legacy carriers but that has not stopped it from being profitable. Like all legacy carriers, US Airways Group Inc (NYSE:LCC)’ earnings rebounded strongly out of the recession despite not having a merger partner.

Today, earnings stand around $3 per share giving the airline a P/E ratio of only a little more than five times. Typically, such a P/E ratio is only given to companies with a perpetually declining business model and US Airways Group Inc (NYSE:LCC) is far from that. In fact, looking forward there are some meaningful opportunities for the airline.

Route network
Compared to the mega carriers resulting from the merger, US Airways route network is far smaller, especially internationally. But airline alliances help the airline to make up for some of this disadvantage. US Airways is a member of the Star Alliance that also includes the world’s largest airline (and major rival) United Continental Holdings Inc (NYSE:UAL). United Continental’s route network is quite extensive and the setup of airline alliances allows US Airways to sell seats on UAL flights and vice versa.

Ever since United and Continental merged, US Airways Group Inc (NYSE:LCC) has been the small American airline in the alliance. While the Star Alliance (and United Continental Holdings Inc (NYSE:UAL)) still benefits from having US Airways operate flights within the alliance, United Continental did not been register any major disappointment with the US Airways- AMR Corporation (OTCMKTS:AAMRQ) merger that would have seen US Airways join American Airlines’ OneWorld Alliance.

This is quite likely due to United Continental Holdings Inc (NYSE:UAL)’s view that further industry consolidation means more than keeping the smallest legacy airline in the Star Alliance. And it appears the market agrees with United Continental Holdings Inc (NYSE:UAL)’s sentiment as the DOJ challenge to the merger sent its shares down along with the broader market.

However, even if the merger fails, US Airways could still have the chance to pick up pieces of American Airlines if the bankrupt carrier decides to slim down in an effort to restructure. While the sale of certain assets would be monitored by regulators, US Airways could still pick up pieces that expand its route network while not necessarily monopolizing any particular airports or routes.

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