The surprising announcement on Nov. 12 that the Department of Justice, or DOJ, had agreed to a settlement allowing the merger of US Airways (UNKNOWN: LCC.DL ) and AMR Corporation (UNKNOWN: AAMRQ.DL ) to form the new American Airlines Group, with an expected close in December 2013. With this settlement in place and the merger proceeding, investors can now review three important numbers for the new American Airlines, which place the new company at very favorable multiples against industry leader Delta Air Lines (NYSE: DAL ) .
Slot pairs manageable
The DOJ agreement obliges US Airways and AMR Corp. to give up 52 slot pairs at Washington Reagan National Airport, or DCA, and 17 slot pairs at New York LaGuardia Airport, or LGA. The new American also has to divest two gates and related support facilities each at Boston Logan International Airport, Chicago O'Hare International Airport, Dallas Love Field, Los Angeles International Airport, and Miami International Airport.
Together, U.S, Airways and AMR Corp operate around 6,600 daily flights, so any impact from the divesture of slot pairs and gates isn't material. In total, the airlines only had to divest a total of 56 daily flights at the two major airports of DCA and LGA. That's a far cry from the 465 flights both airlines operate at those airports. In total, it amounts to roughly 11% of those daily flights.
The hit at DCA is surprisingly not larger than 44 departures out of the 290 daily flights. Considering the roughly 70% combined market share prior to the merger, this outcome was probably an expected requirement when the merger was hatched. Using a rough estimate, the combined airline will still control approximately 60% of the market. Note that the settlement isn't expected to impact employment at the new American.
Synergies remain intact
A huge key to the original merger goals for the new American Airlines was the $1 billion in promised synergies, mainly from increased revenue synergies and some general cost savings. A good sign from the settlement call was the new management team's confirmation that the $1 billion plan is still intact. Clearly, the divestitures agreed to in the settlement met pre-merger expectations.
With an expected combined revenue base of $42 billion, that $1 billion in expected synergies only represents 2.5% of revenue. Still, achieving those goals will further enhance a shift by the new airline toward consistent and growing profits.
Management reconfirmed that US Airways shareholders would obtain 28% of the new company. Based on the current stock price of LCC, the valuation of American Airlines Group equals roughly $17 billion. This valuation compares very favorably to the $24 billion market cap of Delta Air Lines.
The new American will need to show that operations can run as efficiently as Delta, but its larger operation provides a level of opportunity to exceed Delta eventually. Remember that the new American's revenue base will easily surpass the $37.7 billion expected at Delta.
From a valuation standpoint, Delta even trades at less than 10 times forward earnings. Even with the consolidation and higher focus on profits, the industry continues to trade at a substantial discount to the market.
On a trailing-12-month basis, the P/E for the S&P 500 is around 16, while its forward P/E is around 15. Calculating the American Airlines P/E is complicated, but in general investors can use the current P/E of US Airways as a general guide. The original merger agreement promised significant accretion to earnings per share for US Airways shareholders in 2014, which has only been enhanced by increased profitability by both airlines during the summer. Based on US Airways' analyst forecasts, the forward P/E for the new airline will be roughly 7 -- half that of the market, and notably cheaper than Delta.
The settlement with the DOJ was very bullish for the investors of US Airways and AMR Corp. The ability to divest slots and gates without hurting the expected synergies from the merger suggests the deal was inline with pre-merger expectations. In addition, the new American Airlines offers a compelling valuation compared to industry leader Delta Air Lines -- which, in turn, looks attractively valued itself when compared to the market in general.