AMR Corp. and US Airways: “The Merger That Never Should Have Been Blocked”

What a wild ride it’s been for AMR Corp. (AAMRQ) shareholders. The parent of American Airlines lost 45% on the day when the DoJ said it would try to block its merger with US Airways (LCC). Then it started rising as support for the deal grew and analysts predicted as much as a 75% chance that the AMR Corp. and US Airways merger would go through.

Associated Press

Call it 99%. Today the DoJ announced that it would approve the merger, although the combined airline would have to give up some gates at certain airports to promote competition.

Cowen’s Helane Becker and Conor Cunningham call it “the merger than never should been blocked.” They write:

Despite the divestitures, the companies maintained their synergy target of $1 Bn annually by 2015. We believe the company will achieve 25% to 35% of their target in 2014. We have always been skeptical of airline synergy targets but believe the company has significant earnings potential when a single operating certificate is achieved…

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We view the settlement as positive for both the group and more importantly US Airways. The $1.0 billion synergy target is unchanged from prior guidance, despite slot divestitures at Washington National Airport and New York LaGuardia Airport, as well as gates at Boston Logan, Chicago O’Hare, Dallas Love Field, Los Angeles International and Miami
International. We would be a buyer of US Airways on any weakness as momentum traders will probably look to sell despite having a positive outlook on profitability going forward.

S&P Capital IQ’s Jim Corridore reiterated his Strong Buy on US Airways:

The Department of Justice has issued a press release outlining terms of an agreed upon settlement that will allow the merger to go through. LCC will give up 104 slots at Reagan not reserved for smaller planes, 34 slots at LaGuardia, and gates and facilities at various other airports throughout the U.S. We think the divestitures are somewhat more severe than we expected, but do not think they will significantly alter the economics of the merger. The true value of the merger lies in the international route network of American coupled with LCC’s low cost culture and management.

Shares of AMR Corp. have surged 17% to $11.15, while US Airways has dropped 1.4% to $22.95.