Analyst: AMR/US Airways Deal Makes Sense
In a note issued Wednesday, JPMorgan(JPM) analyst Jamie Baker describes himself as "underwhelmed with AMR's standalone restructuring plan" and says that "for this reason, we now ascribe a higher probability that AMR ultimately engages in industry consolidation."
|American Airlines could boost its domestic presence by merging with US Airways, a JPMorgan analyst says.|
"We believe the merits and regulatory challenges of a
Baker questions American's plan to boost revenues by $1 billion annually, saying the number is "ambitious" for a plan based largely on increased code-sharing and larger regional jets. Baker doesn't mention the fleet improvements cited by AMR Chief Commercial Officer Virasb Vahidi, who believes orders from Boeing and Airbus would enable American to fly routes for which it lacks appropriately sized aircraft.
Baker says Delta and United(LCC) have superior domestic networks and he doesn't think American can match them. He cited 30 Eastern cities -- including Albany and Buffalo, N.Y.; Columbia, S.C.; Providence, R.I.; and Richmond, Va. -- where the two larger carriers offer more service to their hubs than American does to its hubs. "We examined several smaller cities east of the Mississippi and in most examples found Delta and United offer several hub options," Baker writes. "In AMR's case, well, one can easily get to Chicago."
Vahidi had indicated that if American can change a pilot contract provision limiting its ability to fly regional jets, it could offer more service to smaller cities.
Baker says a merger with US Airways would bring more service to smaller cities and would maintain the current global structure of three global alliances, each with a major U.S. carrier. Adding US Airways' Philadelphia and Charlotte, N.C., hubs to the Oneworld alliance would bring access to 33 Eastern U.S. cities for British Airways , he said.
While Delta "likely has significantly greater access to capital and credit to pursue consolidation than does US Airways," a Delta-AMR merger would provide significant antitrust risks. Delta and American overlap in 69 domestic markets, while US Airways overlap in just 13, he says.
Meanwhile, American announced Wednesday that it had reached deals with its creditors committee and the Pension Benefit Guaranty Corp. to freeze its defined benefit pension plans for nonpilot employees rather than terminate them.
"The company initially wanted to terminate our pension plan, shift the cost to the government and put our members at risk," Transport Workers Union President James Little says in a press release. "Our negotiating team drew a line in the sand and said this was totally unacceptable."