Weekly Airlines Note: US Airways And United
The past week saw important developments related to three airlines under our coverage. On Monday, September 23, Delta ( DAL ) received approval from the Department of Transportation (DoT) for its joint venture with Virgin Atlantic on routes connecting North America and the U.K. We covered the benefits of this JV for Delta in an article here .
Also on Monday, September 23, US Airways ( LCC ) and American Airlines extended the termination date of their merger agreement by around a month to January 18 next year in order to allow for the trial brought by the Department of Justice (DoJ). This move removes the uncertainty that had arisen due to the earlier December 17 termination date which was very close to the trial start date of November 25. The extended date will allow enough time for the trial with DoJ to complete. Thereafter, in a late Thursday (September 26) filing, United ( UAL ) warned of a weaker than earlier guided third quarter. Following this announcement, the airline's stock dropped by over 9% on Friday. However, taking a longer term view we figure that United is on the path to cutting its losses due to lower Continental integration costs and higher merger synergies.
The extension of the merger termination date by US Airways and American Airlines reflects the commitment of both airlines towards their merger even in the face of the trial brought by the Justice Department. In the past, both airlines have said that they intend to mount a vigorous defense against the lawsuit brought by the DoJ. US Airways and American Airlines contend that their merger will provide customers with a much broader network and an alternative to Delta and United who bulked up in size following their mergers with Northwest and Continental in 2008 and 2010, respectively. The airlines thus believe that their merger will bring three large airlines to the market rather than two and thus increase competition.
The Justice Department on the other hand says that this proposed merger will give more than 80% of the domestic airline market to only four players - Delta, United, Southwest and the merged US Airways-American. The department also figures that capacity reductions following this merger like the ones that followed Delta-Northwest and United-Continental will reduce options for travelers and raise airfares. It thus blocked the merger by filing a lawsuit in August earlier this year.
We figure the merger of US Airways and American Airlines will benefit shareholders of US Airways, debt holders of American which is going through bankruptcy and employees of both the airlines. The consolidation will also be beneficial to the U.S. airline industry which saw enormous losses in the past decade due to over competition, the financial crisis and high fuel prices. For a more detailed analysis of the impact of US Airways-American merger on various stakeholders, read here.
See our complete analysis of US Airways here
United announced in a SEC filing late Thursday that its unit revenue - amount collected from each passenger for a mile of flight - will grow by around 2.5%-3.5% in the third quarter on a year-over-year basis. This guidance is around 1 percentage point lower than the carrier's previous guidance and is primarily due to pressure on its international business. The carrier said that it faced increased competition on trans-Pacific routes to China and realized lower than anticipated yields on some trans-Atlantic routes to Europe which is why it is lowering its guidance for the current quarter. Following this announcement, United's stock crashed by over 9% on Friday - one of the highest single day falls seen in United's stock in the recent past. However, we figure that despite short term challenges United is on the path to lifting its results from the losses of last year.
United acquired Continental in October 2010, but faced several issues while integrating it. Last year, United saw its on-time performance fall much below that of its peers due to IT issues arising from the integration of booking systems of both the carriers. This poor operational performance led many passengers to opt for other carriers and consequently United saw a decline in its passenger traffic. Overall, United booked a loss of $723 million in 2012 due to $1.3 billion in special items including Continental integration costs. However, we figure that the carrier has crossed critical integration stages. Its operational performance has also not been marred by any integration related issues so far this year and it has steadily cut losses due to lower integration costs and higher synergies arising from the merger with Continental. In the first half of this year, United booked a profit of $52 million, up from a loss of $109 million in the prior year period. The carrier is also continuing to reduce its flying capacity in an attempt to fly fuller planes and we figure this will continue to lift its profits.
See our complete analysis of United here