This May Be the Worst Company... Ever!

I've seen some pretty bad companies come and go over the years. The dot-com era brought to light some extremely horrible ad-based business models – eToys, Webvan, DrKoop.com, to name a few – and even previously well-to-do names like Eastman Kodak have discovered that if you don't innovate, your business dies!

But, there's one combination that's threatening to put them all to shame as possibly the worst company of all time. In April of last year I suggested that the combination of American Airlines parent AMR (UNKNOWN: AAMRQ.DL  ) , and US Airways (NYSE: LCC  ) would create the worst airline in history. Well, I'm ready to retract that statement and enhance it by proclaiming a prospective merger between these two would create the worst company, ever! Logistically, financially, and based on history, this may wind up going down as one of the worst mergers in history – if it goes through, of course.

From a logistics perspective, I've been quite clear about my stance that national airlines are doomed to lose share to more nimble regional airlines. Regionals are more easily able to reduce or stop unprofitable routes and can afford to undercut national carriers on price since they rely on large ancillary fees like baggage and, in some cases, carry-on baggage fees, to drive up their margins.

Two such companies are Allegiant Travel (NASDAQ: ALGT  ) and Spirit Airlines (NASDAQ: SAVE  ) which both sport net cash positions (a rarity among airline companies) and charge exorbitant "optional fees" to drive profits. Allegiant purchases older planes in order to keep its costs lower than its peers while Spirit focuses on keeping its routes elastic in order to maximize passenger headcount. An AMR-US Airways merger would boast hubs in seven of nine major cities but make it nearly impossible for the company to reduce or change a route if headcount or fuel costs make a destination unprofitable.

From a financial perspective, the combined entity will be a ticking time bomb. Although AMR has maintained its $4.7 billion in cash through its ongoing bankruptcy proceedings, and US Airways boasts $2.4 billion in cash, I'd project the combined debt between the two still would likely outweigh the available cash. Also, as my Foolish colleague Adam Levine-Weingberg pointed out yesterday, even a 17% reduction in labor costs savings achieved on AMR's end won't help because US Airways' employees are due for a sizable pay hike soon, pitting the two sides at a potential standstill. Based on operations, between 2002 and 2011, the two companies have combined for a staggeringly bad free cash outflow of $12.8 billion. 

Even history acts as a precursor to warn us that airline-ocalypse will be upon us if these two get together. AMR and US Airways have combined for three bankruptcies since 2002 and, also noted by Adam, the United Continental (NYSE: UAL  ) merger, which was expected to show substantial synergies, actually wound up costing the combined entity in 2012, as opposed to saving it money. US Airways projects revenue synergies of $1.2 billion, but fails to account for the bonuses AMR workers will likely demand and the technological integration needed for such large companies. It'd be years before we'd see any significant synergies.

As one final wild card, let's not forget what'll happen to AMR once its lease financing, totaling $13 billion, runs out for its 460-plane, $38 billion order and it has to begin paying for the new planes out of pocket.

I won't jump to any conclusions until I see what bondholders have to say about a prospective merger with AMR next week, but I feel very strongly that this combined entity will be as toxic an investment as I've ever seen.

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Read/Post Comments (11) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 08, 2013, at 2:36 PM, MikeRappeport wrote:

    you just don't get it. You look at only the cost side. You need to look at the revenue side. As a function of the number of passengers the airlines have reduced their capacity to such an extent that

    a) they get higher and higher load factors

    b) they have an almost unlimited ability to raise prices

    When this is combined with the movement in management from guys who like the toys called airplanes (and create bankruptcies) to people who are in business to make money (the current management of U.S. Air for instance) the total revenue will boom (a "tiny" 6% rise in prices on the AMR U.S Air merger is worth about $2.5 billion per year). They are not a problem but a bonanza about to happen.

  • Report this Comment On February 08, 2013, at 2:39 PM, chrsburns wrote:

    How stupid can you be to compare an AA or USAir to Sprint which is a fly by night operation if there ever was? Sprint offers nothing and only ignorant slobs (which the USA seems to be full of) would ever fly that garbage airline. AA/USAir offer multiple daily flights on the same routes, international travel and a huge alliance with other airlines. Get a clue man.....

  • Report this Comment On February 08, 2013, at 3:28 PM, planewings wrote:

    I am embarrassed to say that I ever wrote for the Motley Fool if this is the type of misguided crap MF is now posting. This is the most ignorant read of this potential merger I have read.

    For your information, Spirit and Allegiant are NOT regional airlines. That's one big mistake. SkyWest is a regional airline.

    We don't refer to airlines like US Airways and American as "national" airlines. The fact that you do says again that you don't know what you are talking about.

    Furthermore, there is no better example of what a well-run network carrier or "legacy" airline can do than Delta Air Lines. On any number of financial and operational metrics. So your bashing of the larger "legacy" carriers -- and your comparison to Allegiant and Spirit is ridiculous.

    Allegiant is a hybrid travel company/airline. Spirit is an ultra low fare low cost airline. Their business models are completely different from a legacy airline model.

    Next, the management team at US Airways is not only running one of the most profitable airlines in the U.S. -- it is one of the best run operationally. US Airways and Delta Air Lines are, arguably, running the two best operations in the U.S. right now. Alaska Airlines would be right up there as well. I wonder what you would classify Alaska as -- "a national regional?"

    There are any number of other false assumptions made in this column, but I'll stop with this one -- what "bonuses" demanded from employees are you talking about? Clearly you are not even aware that MOUs have been signed with both pilots and the flight attendants in the AA/US deal.

    Seriously. This is one of the most misleading and off-the-mark pieces I have ever read. You need to do your homework. Or stop posting. One of the two.

  • Report this Comment On February 08, 2013, at 5:18 PM, captkerosene1 wrote:

    There will be a brief period (several years) where airlines thrive because of reduced competition ... but it won't last forever and rising union wages will ultimately make the majors uncompetitive again.

  • Report this Comment On February 08, 2013, at 5:27 PM, Whoopdedoo wrote:

    Been in this biz for 29 years...Gotta agree with planewings. This author can't even differentiate major, national, regional. Intel shows quickly.

  • Report this Comment On February 09, 2013, at 2:50 PM, petunia4r wrote:

    Yes - interesting how people keep comparing a global carrier to discount ones that have 3 flights a day, on off peak hours, to remote cities far from business hubs.

  • Report this Comment On February 09, 2013, at 4:13 PM, phxpaul wrote:

    Wow! Does Sean not realize that Spirit and Allegiant both rely heavily on ancillary charges? Yet he criticizes Legacy carriers for such charges. He really does not know the airline industry at all.

  • Report this Comment On February 09, 2013, at 4:14 PM, paddymelt wrote:

    journaljism

  • Report this Comment On February 10, 2013, at 11:43 AM, trendawareness wrote:

    Let's not loose sight of the big picture.

    The primary reason AMR and LLC are being drawn to the wedding altar is that they're the last boy and girl in town, not because they're necessarily a good match.

    All the rest is after-the-fact rationalizations.

  • Report this Comment On February 11, 2013, at 9:19 AM, ravens9111 wrote:

    Unions bankrupted many of the legacy airlines. The AMR BK is the latest example. Those airlines that have already filed were able to re-negotiate union labor to make them more competitive. AMR has done the same and will come out much stronger out of bankruptcy. This is no different that GM when they went BK because of the UAW. They couldn't afford the high wages or the benefit costs. It was not sustainable. The merger will make the company the largest airliner in world. I think if there is ever a time to buy a company out of bankruptcy, this is one of them.

  • Report this Comment On February 11, 2013, at 7:32 PM, kfchild41 wrote:

    Ok all yal big boys running your trap go ahead and buy into it and lets see who is right!!!!!

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