According to reports, a deal between US Airways Group, Inc. (NYSE:LCC) and American Airlines appears imminent. Here are three reasons the shareholders of US Airways should hope it does not transpire.
First, things are going too well for US Airways with the present operations to risk a major disruption as a merger or acquisition. It just posted a record annual profit. Fourth quarter revenues were higher. Passenger traffic increased by 3.8%, and the load factor, the number of seats filled, rose by 1.4%. Passenger revenue per seat mile also jumped by 2.2%. About these results, the Chief Executive Officer of US Airways, Doug Parker, stated, “We couldn’t be happier with the performance of US Airways in 2012.”
Wall Street agrees with Parker, as the share price has soared 133.54% in the past year. Why risk such a great performance with a merger when things are going so well with the present way of doing business?
Second, mergers generally do not work. Anand Chokkavelu of Motley Fool noted in his piece, “The 100 Things I’ve Learned in Investing,” about these transactions: “Mergers and acquisitions are overrated. Somewhere between 50% and 85% of mergers fail to boost value. The frequency of achieving promised “synergies” should be filed somewhere between unicorns and no-hitters.”
The airline industry has a particularly sorry track record in mergers and acquisitions. Charlie Munger, partner of Warren Buffett, once observed that “The net amount of money that’s been made by the shareholders of airlines since Kitty Hawk is now a negative figure.” That is why American Airlines had to file for bankruptcy as no one wanted to buy it. Republic Airways Holdings Inc. (NASDAQ:RJET) has been trying for over a year to sell Frontier Airlines, with no takers. Delta Air Lines, Inc. (NYSE:DAL) grounded Comair, its commuter division, as it could not be sold.
American Airlines filed for bankruptcy in November 2011. Mergers are tenuous enough: combining with a bankruptcy entity is particularly dubious. As US Airways has filed for bankruptcy twice, this is hardly a panacea for an air carrier. Every legacy carrier in the United States has filed for bankruptcy.
It is also worthy of note that US Airways is the only entity to take a serious interest in American Airlines. There has certainly not been a contest like there was between Republic Airways and Southwest Airlines Co. (NYSE:LUV) for Frontier back in 2009. That should tell something about the appeal of American Airlines as a merger partner or acquisition target.