So much for a quick and easy airline merger.
On Aug. 13, the Department of Justice surprisingly announced that it would be investigating the merger between US Airways Group, Inc. (NYSE:LCC) and American Airlines. The DOJ cited concerns that the deal could lead to anti-competitiveness in the industry. The news sent struggling US Airways Group, Inc. (NYSE:LCC)’ stock plunging 13% that day.
According to the DOJ’s lawsuit, the merger would leave 86% of all American air travel in the hands of just four companies , including United Continental Holdings Inc (NYSE:UAL), Delta Air Lines, Inc. (NYSE:DAL), and Southwest Airlines. However, accounting firm PricewaterhouseCoopers said that previously allowed mergers, of which there are several, have not increased prices and in fact have improved air travel for many according to a recent report analyzing domestic airfares and airline competition over the last decade. Despite this vote of confidence, though, what was a near-sure merger has left doubts in the minds of US Airways Group, Inc. (NYSE:LCC) investors and raised new concerns of government interference in airline mergers.
These threats of a lack of competitiveness haven’t shown themselves yet. The mergers have proved very good for investors in the past, and have propped up the industry during one of its worst decades in history.
Mergers tend to be good things
Since 2001, the airline industry has grappled with both consolidation and competition. As air travel increased across the country, and new security fees were levied post 9/11, smaller regional airlines found it more difficult to compete with established heavyweights. The mergers condensed 10 of the biggest airlines into five; if the US Airways Group, Inc. (NYSE:LCC)/American merger goes through, that number will shrink to four.
Mergers have been very good for profits, though, resulting in long-term success for the big five companies. In 2001, American Airlines merged with TWA, which saved American Airlines from collapse and reasserted it as a competitive airline. This came after a couple AA flights were used for the 9/11 attacks, undoubtedly shaking consumer confidence. Four years later, AA reported its first quarterly profit since the merger, but workforce problems and credit trouble sent the company back into decline.
US Airways also had a big merger in 2005 with America West, after emerging from a second bankruptcy filing and labor cuts in 2004. This merger helped US Airways Group, Inc. (NYSE:LCC) get back on solid footing, and it even tried to get its hands-on Delta Air Lines, Inc. (NYSE:DAL) in what was considered a “hostile takeover” bid. The plan fell through after Delta Air Lines, Inc. (NYSE:DAL) shareholders refused to agree to it.
US Airways Group, Inc. (NYSE:LCC)’ share price tripled after the America West merger , from $20 to $62 a share. But it collapsed like other airline companies during the 2008 recession, down to $13 a share, before news of the merger with AA sent the stock up 33% to $17. Meanwhile, after saying no to US Airways’ $10 billion takeover bid, Delta Air Lines, Inc. (NYSE:DAL) acquired Northwest Airlines in 2009, immediately doubling its stock price following the deal. It’s been up 278% since the merger.
US/American deal not a game changer
The Justice Department’s main complaint comes from the fact that the deal would create the country’s largest airline, decreasing competition and potentially increasing airfare prices for customers. A US/American merger would create a company with a $4.2 billion market cap, $3.2 billion EBITDA, and $35 billion in assets. While those are substantial numbers, none would make the company the largest among the other three competitors:
|Airline||Market Cap||Assets (2012 annual report)||EBITDA (ttm)|
|Delta||$16.62 billion||$45.77 billion||$4.71 billion|
|Southwest||$9.51 billion||$19.38 billion||$1.71 billion|
|United||$10.94 billion||$37.47 billion||$2.85 billion|
|US/American||$4.2 billion||$35.1 billion||$3.2 billion|