Don’t Go Crazy Over an AMR-US Airways Deal

Airline mergers offer big risk, little reward

   
Don’t Go Crazy Over an AMR-US Airways Deal

A month ago, when American Airlines parent AMR Corp. (PINK:AAMRQ) sat down for talks with US Airways (NYSE:LCC) about merging to create the nation’s biggest carrier by traffic, they promised a decision in a “matter of weeks.”

Based on the latest media reports, it looks like the troubled airlines were as good as their word.

However, whether yet another mega-merger in the airline industry proves to be a good deal for investors is very much a crap shoot.

In a business rampant with consolidation for more than two decades, the sad fact remains that airline mergers are incredibly tough to pull off. Turbulent labor relations, incompatible technology infrastructure and culture clashes mean many of these mergers never fly as promised.

It also doesn’t help that even in good economic times, generating consistent profits in the airline industry is remarkably challenging. Case in point: The same pro-cyclical economic forces that boost demand for flights also tend to raise the massively burdensome cost of jet fuel.

Yup, there are reasons why airlines are perpetually going bankrupt. AMR is currently in Chapter 11. US Airways has been through it twice.

That said, negotiations to merge the two companies are at an advanced stage, according to The Wall Street Journal, though they could still fall apart. For one thing, because AMR filed for bankruptcy protection in 2011, its creditors need to sign off on the deal.

If the deal does go through, AMR would emerge from bankruptcy as part of a combined company with a market capitalization of $10 billion — 72% owned by AMR creditors and 28% held by US Airways shareholders, according to WSJ.

True, if mergers can keep airlines out of Chapter 11, that’s certainly a big plus for investors, who get wiped out in such proceedings. But then, the post-merger share performance of these new entities isn’t something most retail investors are likely to be comfortable with, either.

Take Delta Air Lines (NYSE:DAL), for example, the one airline that is singled out as doing mergers better than any other company in the industry. Shares are essentially flat since the company announced its tie-up with Northwest back in April 2008.

Even worse, investors probably needed airsickness bags to cope with all the volatility.

From top to bottom, DAL has swung in a range of about 100 percentage points. Just have a look at the stock’s aerial acrobatics, courtesy of YCharts, below:

DAL Chart Dont Go Crazy Over an AMR US Airways Deal

It’s also been a bumpy ride for shareholders in United Airlines (NYSE:UAL), which merged with Continental in 2010:

UAL Chart Dont Go Crazy Over an AMR US Airways Deal

Whether the AMR merger with US Airways goes through or not, it’s hard to see why retail investors would go stock-picking in this industry. Between the high incidence of bankruptcy and truly epic volatility, the risks too often outweigh the rewards.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2013/02/dont-go-crazy-over-an-amr-us-airways-deal/.

©2014 InvestorPlace Media, LLC

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