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Today's coverage of the airline industry is dominated by the merger trial surrounding US Airways (UNKNOWN: LCC.DL ) and American Airlines parent company AMR (UNKNOWN: AAMRQ.DL ) . So far, most coverage has centered on three potential solutions.
Two of the solutions would come from the court. The airlines would win and be able to merge in one situation, while the Department of Justice would prevail in the other, by blocking a merger. A third solution comes about from an out-of-court settlement between the airlines, the DOJ, and the states that joined the lawsuit. In this situation, the airlines would be allowed to merge with additional conditions.
But I believe it's important to consider additional potential solutions for US Airways and AMR. Let's examine a few of them.
The Oneworld solution
While the current plans center around US Airways and AMR's desire for a full integration, this solution would allow some of the merger benefits but not all of them.
US Airways has become somewhat of a third wheel in the Star Alliance after Continental Airlines joined the alliance in the merger that formed United Continental Holdings (NYSE: UAL ) in 2010. As a result, it makes a lot of sense that US Airways would join the Oneworld alliance alongside American Airlines.
Under the current merger plan, this would effectively happen since US Airways and American Airlines would be integrated and the new airline would be part of Oneworld. However, an alternative plan could allow for US Airways to join Oneworld in lieu of a full merger.
In that situation, US Airways may be allowed to take an equity stake in AMR, considering US Airways' strong cash position and AMR's need for capital as it restructures and emerges from bankruptcy on its own. Depending on the size of the equity stake US Airways would take in AMR, it may be possible that current AMR common shareholders would see some return on their investment. However, because US Airways wouldn't be able to supply as much in terms of shares or capital than it would in a full merger, the fate of AMR common shareholders would be in question.
Airlines have used alliances to get around merger restrictions regarding cross-border ownership. United Continental and Air Canada wouldn't be allowed to merge under current rules because of international ownership restrictions. However, since both airlines are in the Star Alliance, they can sell seats on each others' flights.
The mini-American solution
This solution may be reached in a DOJ settlement or as part of an asset exchange or divestment. Much of the DOJ's concerns originate from a concern involving a small number of competitors in the market. Under this solution, US Airways and AMR would be allowed to merge but would have to form a separate smaller carrier out of routes that the DOJ fears the new American Airlines Group would otherwise monopolize. This mini-American Airlines would be designed to provide competition on routes where fears of a lack of competition currently exist.
Unlike the Oneworld solution, AMR common shareholders are far more likely to recover value here. Most likely, the current share exchange rates in the merger plan would be kept. The new American Airlines Group may have less value total, reducing the value of AMR common shares. However, that could be partially mitigated since the merged airline could raise some cash from the sale of the mini-American, whether through an IPO or sale to an investment group.
Airline investors should continue to watch the news surrounding this megamerger and weigh the chances of seeing some unconventional solutions.
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