American Airlines Gets Real and Prepares for Sale: is US Airways Ready? (LCC, LUV, JBLU)

http://www.smallcapnetwork.com/American-Airlines-Gets-Real-and-Prepares-for-Sale-is-US-Airways-Ready-LCC-LUV-JBLU/s/via/3420/article/view/p/mid/1/id/905/

US Airways is Most Likely Bidder

By Jonathan Yates

Woody Allen, the director and actor, once observed that, "Realty sucks, but its the only place you can get a really good steak dinner."  Reality has forced its will on American Airlines as, according to Reuters, "AMR Corp, (PINK: AAMRQ), parent of American Airlines, bowed to pressure on Friday from its unsecured creditors, including its largest labor unions, and said it would explorer merger options while it is still in bankruptcy."

As detailed in many previous articles on www.smallcapnetwork.com, US Airways (NYSE: LCC) appears to be the most likely bidder.  US Airways has already been meeting the unions of American Airlines and working out a labor agreement.  While a recent article in Bloomberg Businessweek speculated that American Airlines might be seeking to expand and make a play for JetBlue (NASDAQ: JBLU), that looks very unlikely now.

What makes the US Airways bid so probable is as, one analyst noted, the company has to merge or it will go under.  If it does, that will be the third bankruptcy for US Airways.  American Airlines was the last US legacy carrier to go into bankruptcy.

Some airlines merge well.  A previous article on www.smallcapnetwork.com reported how adroitly Southwest Airlines (NYSE: LUV) had expanded through shrewd acquisitions.  Like US Airways is seeking to do now, Southwest Airlines expanded though acquiring competitor assets that were trading low.  Based on the stock performance, Wall Street is bullish on the United Continental (NYSE: UAL) merger.

However, the market for airlines now is weak.  American Airlines tried but could not sell American Eagle, its regional carrier.  Republic Airways (NASDASQ: RJET) ha been unsuccessful in its attempts to offload Frontier Airlines.

American Airlines is an unprofitable airlines, losing money heavily.  US Airways is one of the least profitable airlines.  The profit margin for US Airways is 1.75%.  But the share price has been rising in expectation of the acquisition.  Over the last week of trading, US Airways is up 5.79%.  Year to date, it has risen by 123.27%.  

Mean reversion trading could lead to profits here.  US Airways has obviously been rising in anticipation of it acquiring American Airlines.  The debt load of US Airways at present is troubling.  What it will be like after acquiring American Airlines, which is losing the long green, should have a negative impact on operations and the financials of US Airways.  

Synergy can only go so far and has a tendency not to reach the lofty levels predicted by investment bankers before the deal.   The example of Frontier Airlines and Republic Airways is testament to that.  Eventually the fundamentals will adjust the share price for US Airways; and small cap speculators, traders and investors should prepare for that eventuality.