How These Companies Will Bid Against US Airways Group Inc. (LCC): Delta Air Lines, Inc. (DAL), Southwest Airlines Co. (LUV)

Page 1 of 2

The airline industry has seen many mergers in last few years. Delta-Northwest in 2008, United-Continental in 2010 and Southwest–AirTran in 2011 are few big examples of mergers in this industry. The recently announced merger between the US Airways Group, Inc. (NYSE:LCC) and the American Airlines is yet another addition on the list. What makes this merger more special is that the combined entity will become the world’s largest airline once completed. While this merger will definitely create more opportunities for the travellers; it will also have a significant impact on the other players of the industry. Some of the competitors will be benefited from the improved pricing power while others can feel the pressure of the rising competition. In this post, I am trying to analyze 3 dominant airline stocks and what will be the effect on their position because of this big development in this industry.

US Airways Group Inc (NYSE:LCC)Delta Air Lines, Inc. (NYSE:DAL)Always a favorite

Delta Air Lines has been on a rally since the last six months with a return of around 58%. American Airlines’ bankruptcy filings along with the operational challenges for other major players resulted in the revenue outplay for this company in 2012.

Delta will be one of those players which will see a much lesser impact of the recent merger. The company has its eyes on the New York market to gain a higher market share there. As the US Airways has an extensive hub in Philadelphia, the newly combined entity is expected to focus more towards expanding its footholds in Philadelphia. In such a situation, Delta will be able to further enhance its position in New York. The company announced its joint venture with Britain’s Virgin Atlantic, which will help it in expanding its presence in this critical market. Delta bought 49% of stake in Virgin Atlantic from Singapore Airlines for around $360 million and both the companies have agreed to a joint venture. This deal will be a booster to the New York – London market which remains as one of the most competitive routes. Both the companies are planning to launch a total of nine daily round trip flights on this route. This joint venture will also help Delta to increase its presence at London-Heathrow.

2013 will be an important year for Delta’s shareholders, as the company is coming up with its formal dividend policy in June. The company will be achieving its net debt goal of $10 billion in 2013. Therefore, the excess of the free cash flow will flow back to the investors via dividend and share buybacks. I see Delta Airlines as a strong potential investment considering its market share gains and the upcoming dividend policy.

United Continental Holdings Inc (NYSE:UAL)Is the worst over?

Year 2012 was a troublesome period for the company with its merger integration resulting in various operational issues. This was clearly visible in the company’s fourth quarter as well as full year results for 2012. The quarterly revenue for the company was down by ~2.5% y/y to ~$8.7 billion. The full-year EPS of the company witnessed a drastic downfall of around 54% y/y at $1.59 per share. Apart from the operational changes, the results were affected by the higher costs pertaining to maintenance and wages. I feel the recent merger of US Airways and American Airlines will have a negative impact on United Continental. The company has routes overlapping with American Airlines on various competitive hubs such as New York, Chicago and Los Angeles. Following the merger, American Airlines will give a tough fight to United to enhance its position in these markets.

Page 1 of 2