Will the Fourth Time be the Charm for American Airlines? – US Airways Group, Inc. (LCC)

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There are the usual hopes for any merger: consolidation, synergy, etc. But consolidation in recent years involving Southwest, Delta Air Lines, United, and Republic Airways Holdings Inc. (NASDAQ:RJET), among others, did not keep American out of bankruptcy court. In addition, discount carriers such as Southwest, JetBlue, and Spirit Airlines Incorporated (NASDAQ:SAVE) have become stronger on many lucrative routes, accounting for 37% of all domestic travel.  As for rising ticket prices as a result of industry consolidation, domestic fares have fallen about 15% since 2000.

Writing in a March 2012 op-ed in USA Today, Phil Longman, a senior research fellow with The New American Foundation, called for the government to “…re-regulate airlines to ensure solvency…” as the “…industry’s problems are structural and deepening…”  Moreover, costs will certainly be high to assimilate the operations of US Airways and American Airlines.  The debt load after a US Airways-American Airlines merger should be staggering for the surviving entity.

This debt factor also weighs down the investment prospects of the entire airline sector, except for Spirit Airlines.  Southwest Airlines is clean with a debt-to-equity ratio of 0.45, even after the AirTran purchase.  The merger with Continental and picking up of the routes to England from Virgin Atlantic has Delta Air Lines’ debt-to-equity ratio at a jaw-dropping 11.86.  For United-Continental, the costs of the merger and other matters has the debt-to-equity ratio at 6.64.  For JetBlu, it is 1.54.  Pre-merger, US Airways is already larded up with a 6.1 debt-to-equity ratio.

The table below shows that even during a period of consolidation in the airlines industry, sales and earnings-per-share growth has been very low, while the debt load has been sizeable.

Metric US Airways Southwest Airlines Delta Air Lines United-Continental JetBlu
Debt-to-Equity Ratio 6.1 0.45 11.86 6.64 1.54
Earnings-per-Share Growth Past 5 Years (7.12%) (7.91%) (25.86%) 0.59% 41.69%
Sales Growth Past 5-Years 3.40% 11.62% 13.87% 13.02% 11.87%

Source: Finviz and YCharts

Should Foolish investors expect a soaring share price for the long term now that US Airways will indeed join together with American Airlines?  Based on the history of both airlines and the incredibly competitive marketplace, it would appear that the price taking off for US Airways from under $4.50 in November 2011 to around $14.30 today will have been the greatest gains for shareholders.  With its earnings-per-share growth up 142.14% this year and the AirTran acquisition assimilated, Southwest Airlines should have the best long term prospects.

The article Will the Fourth Time be the Charm for American Airlines? originally appeared on Fool.com and is written by Jonathan Yates.

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