I’ve seen some pretty bad companies come and go over the years. The dot-com era brought to light some extremely horrible ad-based business models – eToys, Webvan, DrKoop.com, to name a few – and even previously well-to-do names like Eastman Kodak have discovered that if you don’t innovate, your business dies!
But, there’s one combination that’s threatening to put them all to shame as possibly the worst company of all time. In April of last year I suggested that the combination of American Airlines parent AMR, and US Airways Group, Inc. (NYSE:LCC) would create the worst airline in history. Well, I’m ready to retract that statement and enhance it by proclaiming a prospective merger between these two would create the worst company, ever! Logistically, financially, and based on history, this may wind up going down as one of the worst mergers in history – if it goes through, of course.
From a logistics perspective, I’ve been quite clear about my stance that national airlines are doomed to lose share to more nimble regional airlines. Regionals are more easily able to reduce or stop unprofitable routes and can afford to undercut national carriers on price since they rely on large ancillary fees like baggage and, in some cases, carry-on baggage fees, to drive up their margins.
Two such companies are Allegiant Travel Company (NASDAQ:ALGT) and Spirit Airlines Incorporated (NASDAQ:SAVE) which both sport net cash positions (a rarity among airline companies) and charge exorbitant “optional fees” to drive profits. Allegiant purchases older planes in order to keep its costs lower than its peers while Spirit focuses on keeping its routes elastic in order to maximize passenger headcount. An AMR-US Airways merger would boast hubs in seven of nine major cities but make it nearly impossible for the company to reduce or change a route if headcount or fuel costs make a destination unprofitable.
From a financial perspective, the combined entity will be a ticking time bomb. Although AMR has maintained its $4.7 billion in cash through its ongoing bankruptcy proceedings, and US Airways boasts $2.4 billion in cash, I’d project the combined debt between the two still would likely outweigh the available cash. Also, as my Foolish colleague Adam Levine-Weingberg pointed out yesterday, even a 17% reduction in labor costs savings achieved on AMR’s end won’t help because US Airways’ employees are due for a sizable pay hike soon, pitting the two sides at a potential standstill. Based on operations, between 2002 and 2011, the two companies have combined for a staggeringly bad free cash outflow of $12.8 billion.