US Airways Poised to Prosper Alone

With all of the debates regarding the US Airways (NYSE: LCC  ) merger with American Airlines (UNKNOWN: AAMRQ.DL  ) , the market has missed the strong results of US Airways as a stand-alone company. Though the airline might need the merger to compete equally with the other major carriers, US Airways appears poised for better days regardless.

The companies originally announced the merger back in February, but the Department of Justice (DOJ) shocked the markets by filing to block the merger in August. The stock plummeted on fears that the inability to further consolidate the industry would lead airlines to the price wars of the past. The August data doesn't suggest that scenario is actually occurring, or will occur.

Merger dilemma

While the merger with American Airlines provides significant synergies, it doesn't mean the airline can't survive without it. US Airways has been producing significant profits, and blocking of the merger by the DOJ won't make the industry suddenly want to compete aggressively against each other. Does American Airlines really want to be aggressive on pricing after coming out of bankruptcy?

At the end of August, a federal judge set a trial date of Nov. 25 to decide the government's lawsuit blocking the proposed merger. While that's quicker than the March 2014 date originally proposed by the DOJ, the three months timeline to start the trial and uncertain outcome places American Airlines in a precarious place. The airline is attempting to exit from bankruptcy, and it had originally based that plan on a merger with US Airways.

The government's main concern rests with the 1,043 city pairs that it says will no longer have acceptable competition after the merger. Ronald Reagan Washington National Airport, in particular, has 69% of its takeoff and landings controlled by US Airways and American Airlines.

Regardless of the outcome, US Airways appears to benefit in either scenario. Delaying the merger could further weaken American Airlines in bankruptcy, providing a boost to all other airlines. Approving the merger allows the combined entity to compete effectively against Delta Air Lines (NYSE: DAL  ) and United Airlines. The alternative is that American emerges from bankruptcy independent -- in short, no different than the market's current situation.

Record August load factor

US Airways enjoyed a record load factor of 87.9% in August, up 0.6 points versus August 2012. The increase came even with a 5.6% increase in the available seat miles (ASMs). While the company grew ASMs in Latin America by 9.5%, the real growth in load factor came from the 7% increase in Atlantic revenue passenger miles (RPMs) on an only 3.8% increase in ASMs. This move contributed to a 85.8% load factor for the Atlantic flights. 

Its US Airways Express segment didn't do nearly as well, with a 3.2-percentage-point drop in load factor, but overall the airline performed strongly in the busiest period of the year. While the company didn't release data regarding pricing, the numbers suggest that the company should report fairly strong earnings for Q3.

Delta affected?

Delta's stock has held up the best during the airline industry selloff that followed the DOJ's decision to block the merger, but he August results don't suggest that Delta is benefiting from the blocked merger. While the airline saw a large 17% jump in Latin America RPMs, the overall load factor dropped to 87.3%, as its mainline domestic load factor fell by 1.8 percentage points. If anything, it appears that Delta might benefit greatly from fewer competitors.

Bottom line

The data doesn't suggest that US Airways will be better off after the merger. If anything, the reduced competition from a merger could help Delta and United the most. American remains a risky proposition for long-term investors, but the numbers at US Airways suggest the company is sitting in the sweet spot, with plenty of levers for improving its results regardless of the merger outcome.


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