US Airways (NYSE:LCC), the oft-beleaguered carrier, has emerged from bankruptcy, trimmer and supposedly stronger after a merger with America West and a year in bankruptcy. I've my doubts that any real good can come of this, but apparently many of you don't share my concern. The stock, which now trades under the all-too-cute symbol LCC -- for "low-cost carrier" -- saw its shares rise more than 6% by yesterday's close.
Cash your reality check
Who are you people? Are you the same ones who bid upDelta (NYSE:DAL) 40% when it filed for bankruptcy protection? If so, good luck. But if you're not, and yet you find yourself oddly intrigued and contemplating a purchase, I'd like to point you to the top four reasons not to buy, as recounted by US Airways. Yes, you read that right. These come straight from the airline's S-1 filing, beginning on page 16 with "Risks Related to Our Business":
1. Fuel costs are high. "Continued periods of historically high fuel costs, significant disruptions in the supply of aircraft fuel, or significant further increases in fuel costs could have a significant negative impact on our operating results."
There are three factors to look at here. First, oil is, as of this writing, priced at around $67 per barrel. Second, no fewer than three times in the S-1 does the company say that its financial position may prevent it from obtaining futures contracts to hedge against the rising price of fuel. And, third, still-bankrupt United says that it needs oil to average around $50 per barrel over the next five years to meet its targets. It's probably a good bet that US Airways management is hoping for the same or better in its recovery plan.
2. Unwarranted optimism. "We may not perform as well financially as we expect following the merger."
The fiscal health of the new US Airways is completely dependent on being able to realize $600 million of what it calls "synergies." Reduced fleet size is expected to contribute $175 million. Reduced administrative overhead -- that is, facility closures and IT infrastructure cuts -- is expected to contribute $200 million more. And the $225 million that remains? Where will that come from? Your guess is as good as anyone's.
And don't be quick to say it will come from labor. The new airline has already squeezed its employees tight enough to get blood from a stone. And unions would likely resist anyway, having already filed objections to the new business plan. (Though, to be fair, those complaints were aimed at executive severance pay.)
3. The merger will be hard. "The integration of US Airways Group and America West Holdings following the merger will present significant challenges."
It sure will. Most mergers fail, after all. This ditty at the end of page 16 offers a good illustration of why: "The integration of US Airways Group and America West Holdings will be costly, complex, and time-consuming, and the managements of US Airways Group and America West Holdings will have to devote substantial effort to such integration that could otherwise be spent on operational matters or other strategic opportunities."
4. Losses are still huge. "US Airways Group continues to experience significant operating losses." The document goes on to say that losses will probably continue through at least 2006.
To sum up, in other words, what US Airways is saying: We're not yet sure we'll make money, but we'll figure it out. Trust us.
Uh-huh. Suuuuuurrrrrrre, you will.
The Siren song of bankruptcy -- don't buy it
Hey, I know it's easy to fall in love with companies exiting bankruptcy. They're supposedly leaner and meaner. US Airways certainly fits the former description in that it has trimmed its net debt (which includes lease obligations) to $1.6 billion on operating revenues of just about the same amount, according to the S-1. But that's nothing compared with Southwest (NYSE:LUV), which has more than $200 million in net cash as of its most recent quarter on revenues of $6.5 billion, according to Yahoo! Finance.
Maybe that's an unfair comparison. But US Airways did restructure itself with the intention of better competing with Southwest and Motley Fool Stock Advisor pick JetBlue (NASDAQ:JBLU). Factor in United's Ted, Delta's Song, and innumerable regional carriers, and you can't help concluding that the low-cost bin is already too full. And that's why I can't get very excited about US Airways' plan. You probably shouldn't, either.
Don't fly away yet! We have related Foolishness for you:
- Why not celebrate bankruptcy? The airlines sure are.
- Is JetBlue really worth the price? Do tell.
- US Airways has to break out of its holding pattern.
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Fool contributor Tim Beyers didn't own shares in any of the companies mentioned in this story at the time of publication but he has family members who are retired from United Airlines. You can find out what's in his portfolio by checking Tim's Fool profile, which is here. The Motley Fool has an ironclad disclosure policy.
