You know we've all had that friend at some point in our lives that just can't stand to be single. It doesn't matter if the person they're with is right for them -- they simply need the comfort of a relationship. National airline US Airways (NYSE: LCC) is the corporate equivalent of that friend.
After suffering not one, but two bankruptcies over the past decade and failing to get approval to merge with Delta Air Lines in 2006, US Airways has now taken to bringing flowers on a daily basis to AMR's American Airlines. On top of this, US Airways has the stinging reminder that United completely snubbed the company when it merged a few years ago to create United Continental Holdings (NYSE: UAL).
To be clear, US Airways hasn't officially endorsed that it's seeking a merger with American Airlines, but the labor unions on each side have come to an agreement that it's in the best interests of both companies to eventually merge. The merger, they contend, will save up to 6,200 of the 14,000 jobs that AMR has planned to cut in response to its bankruptcy reorganization. With few overlapping routes, it's also likely that the merger would garner antitrust approval.
But what would you really be getting with this possible merger? The worst airline in history!
Worst... airline... ever!
The combination would result in a company with nearly $6 billion in cash, but – get this – almost $16 billion in debt! Not to mention this combined entity would have declared bankruptcy three times in the past decade (once for AMR, twice for US Air). However, this is just the beginning of their problems.
The airline industry has witnessed a definitive shift in recent years away from national carriers and toward regional providers. The reason for this shift is that regional airlines like Allegiant (Nasdaq: ALGT) and Spirit Airlines (Nasdaq: SAVE) can offer teaser prices that undercut the national airlines. These regional airlines also have more route flexibility and rarely have the same expense structure as national carriers since they often purchase older planes for their fleet.
This would probably be a good time to mention that AMR inked a deal with Boeing and Airbus in July, just months before its bankruptcy, to purchase 460 new planes valued around $40 billion! American Airlines justified this purchase by claiming that it needs these new planes in order to be price competitive with fuel costs rising. Clearly, it's worth spending about $2 billion per year for new planes when fuel costs are losing the company less than $2 billion each year. Go ahead... reread that sentence. That's what I refer to as "airline industry math."
Another way of putting it: AMR did not pass go and went directly to jail and US Airways is going to be there to bail them out -- debt and all.
Here's an even more telling tale of what you'd get with an American Airlines and US Airways merger: $12.8 billion in total cash outflows over the past decade! With American Airlines losing money in eight of the past 10 years and US Airways having a cash outflow in seven of the past 10 years, I feel it wouldn't be giving investors and Vegas casinos enough time to get our bankruptcy bets in before the company found itself in a liquidity crunch again.
Foolish roundup
There are bad ideas, and then there's this. I can't say I care for US Airways stock here at all, but I really hope, for the shareholders' sake, the company doesn't proceed in merger discussions with American.
Is this the worst idea ever in the airline industry? Tell me about it in the comments section below.
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