There isn’t much to point to a severe lack of competition — at least, not in comparison to other mergers. In fact, given the small market share that US Airways and American have, it may not be that noticeable to passengers looking for competitive rates.
But the deal would make a big difference for investors, transforming two companies with a history of financial trouble into one business that is better able to compete with companies like Delta and United Continental Holdings Inc (NYSE:UAL), the two biggest players.
Delta Air Lines, Inc. (NYSE:DAL) reports the industry’s strongest net profit margins with 4.75%, and trades with a 6.5 forward P/E, with a cash flow of $2.48 billion. Despite such a low profit margin, it is actually very good within the context of an airline industry that routinely struggles to turn a profit, much less have a strong cash flow.
United Continental Holdings Inc (NYSE:UAL) isn’t a slouch, either, with the same forward P/E. But it isn’t running a profit, with a negative 1.5% profit margin and a low $935 million cash flow. In contrast, US Airways has maintained a slightly higher $1.02 billion cash flow, thanks to lower liabilities and costs. This may not seem that much right now, but since US Airways Group, Inc. (NYSE:LCC) has reduced those costs, its profit margins and cash flow will likely improve further, putting the company in a stronger forward-looking position with investors.
The status of Delta Air Lines, Inc. (NYSE:DAL) and United as the two strongest companies shows that a US/American merger would not be a game-changer, despite being the largest airline in the country. The competition and push to cut costs is still there, and will still benefit customers in the long run.
The bottom line
The DOJ lawsuit, given the overstated influence of a US/American merger, will hurt investors. The entire industry took a hit when the news broke, with Delta down 7% when it was reported, showing there is a demand for a new competitive airline.
Delta and United are by far the best bets still, but Delta is the stronger of the two. US Airways will need to take a wait-and-see approach once the lawsuit clears up.
It’s a shame that a frivolous lawsuit is harming a relatively small merger, and it breaks nearly a decade of precedent. But until this suit gets settled, it’ll probably prove painful for shareholders.
The article DOJ Airline Lawsuit Is Much Ado About Nothing originally appeared on Fool.com and is written by John McKenna.
John McKenna has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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