US Airways Saga Proves Mergers Only a Band-Aid

brokenwrench

Senior
Oct 27, 2006
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www.amfadelta.com
http://www.thestreet.com/_yahoo/newsanalys...E&cm_ite=NA

CHARLOTTE, N.C. -- The merger between US Airways (LCC) and America West two years ago was in many ways among the most successful airline deals in history, but it hasn't done much for long-term shareholders.

In fact, US Airways shares recently dipped below $20, their price when the airline emerged from bankruptcy in September 2005. The shares traded as high as $63.27 in November 2006. On Friday, they closed at $20.77.

To be sure, some investors made money. Most prominent among them is Boston hedge fund PAR Investment Partners, an early investor during the US Airways bankruptcy and at one time the combined airline's largest shareholder. PAR sold 6.75 million shares in May at around $36 and 6.5 million in February at about $58. It had bought about 11 million shares at $15 and another 2.75 million at around $40.

But in general, the recent story of US Airways is a cautionary chapter in the long saga of how airlines have destroyed investment value throughout the industry's history.

The US Airways and America West combination "shows that mergers work, but they work in the short term," says Morningstar airline analyst Brian Nelson. "This transaction enabled the company to extract several hundred million dollars in network synergies, but I don't think it was enough to ultimately fix the carrier or to stimulate widespread consolidation."

It is easily forgotten today, but giddiness abounded in the merger's early days. The transaction combined an airline in bankruptcy with a smaller airline closing in on bankruptcy to produce astonishing second-quarter 2006 growth in revenue per available seat mile: 28.8% at the former carrier and 18.6% at the latter. In the spring of 2006, shares surged, and JP Morgan analyst Jamie Baker set a target price of $100.

Flush with success -- or perhaps aware that it could not possibly continue -- CEO Doug Parker mounted a hostile bid to acquire Delta (DAL) . That merger would have enabled the eighth-biggest airline, measured by 2004 revenue passenger miles, to take over the seventh- and third-largest airlines in less than two years.

Failure meant a plunge in the share price. The bid for Delta was unveiled Nov. 15, 2006, and withdrawn Jan. 31 this year. From its opening on the day the merger collapsed, the shares have lost about 63% of their value, while the Amex Airline Index has fallen about 34%.

Today, US Airways no longer has a lead role in the industry's consolidation drama. "It's not as if we can force it to happen at this point," Parker conceded at a recent investor conference. "Being the sixth of the big six, we're not going to be somebody's first choice."

FTN Midwest Securities analyst Mike Derchin says part of the reason the stock went up was merger fever. "But after the attempt with Delta failed, people assumed there would be no more mergers for a while, which affected all the airlines," he says. "Then, as the year went on, we had higher oil prices and people got nervous about the economy."

Other factors also came into play.

As the legacy carriers' focus shifted to more profitable international flying, US Airways lagged. US Airways has less than a third of its capacity in international markets. In 2006, international flights accounted for just 20% of the total, largely explaining why "US Airways is probably least attractive in consolidation scenarios," Nelson says.

Labor integration has gone poorly, largely owing to a questionable ruling on seniority by an arbitrator for the Air Line Pilots Association. Pilots from the former US Airways find the ruling so deeply inequitable that they are seeking to replace ALPA, a divisive process that has delayed negotiations for a new pilot contract.

"Because the work forces of America West and US Airways have not been integrated, you don't really know what the final labor cost number is going to be," Derchin says. "I don't think it will be outrageous, but everybody assumes it will be higher, and it is an overhang on the stock."

Other issues include a relatively low amount of hedging against increases in fuel-cost expenses, as well as increased spending to improve customer service.

Despite unresolved labor issues, few dispute the wisdom of the merger. "You can't fault management, but the market has been brutal on the stock," Derchin says, as the cards have stacked up against the carrier.

Says Nelson: "A merger premium was introduced, then eliminated. The market is pricing in elevated jet fuel prices. There is economic uncertainty and possibly a downturn in air travel. US Airways is primarily domestic and has a rising cost structure, including looming labor cost inflation.

"Throw all of these things in a hat," he continues. "Any one of them could be the reason the stock has not performed well."
 
http://www.thestreet.com/_yahoo/newsanalys...E&cm_ite=NA

"You can't fault management, but the market has been brutal on the stock," Derchin says, as the cards have stacked up against the carrier.

What planet does this moron live on? Can't fault management? It's totally, 100% the fault of management.

Even the integration of the pilot seniority list might have already been a done deal if Parker had begun contract negotiations promptly and in good faith. Had Parker's penchant for sticking it to the employees not interfered with negotiations, the joint contract may have been signed BEFORE Nicolau ruled. This would have meant a completely combined operation when the FAA granted the single certificate in September, 2007. (It would NOT have been a pretty aftermath, but the deal would have been done nevertheless.)

Because of Parker's obstinate, misplaced greediness (in the name of shareholder value,) he missed a huge opportunity, and the east pilots got the chance to throw a huge monkey wrench into the operation and cause shareholder value to plummet.

Way to go, Doogie! It's a tough lesson that business school never taught you: Employees are Individual Human Beings that have to be treated as such and not mindless cogs in the machinery of your operation.
 
I disagree with the premise that the bungled HP/US acquisition/merger proves that mergers don't work; IMO, the bungled US deal only proves that US management isn't up to the task of running a large airline.
 
Mergers work, but you have to know what to do AFTER the acquisition.

Doug Parker started a war in another country without an exit strategy!
 
PO'ed PHX Ramper, nycbusdriver, FWAAA.....

You folks are completely, 110% right, not only in the big picture, but with the ideas presented in the discussion.

It is AMAZING a journalist would print this....then again, the media tends to print/present distortions DAILY.

You guys are EXACTLY right....a real leader, with real plans and real strategies CAN make a merger and consolidation work.
 
stock hasn't done much for long-term shareholders. What is long term? Holding over the weekend? Stock has only been out less than three years. Mergers are a thing of the past. Next round will be liquidation to consolidation. No messy labor issues. Watch all that cash on hand evaporate over the coming new year. Airlines will get it right next round and it will be ugly for those of us still around.
 
stock hasn't done much for long-term shareholders. What is long term? Holding over the weekend? Stock has only been out less than three years. Mergers are a thing of the past. Next round will be liquidation to consolidation. No messy labor issues. Watch all that cash on hand evaporate over the coming new year. Airlines will get it right next round and it will be ugly for those of us still around.
We seem to be making money vs. losing money (which brought us to two BKs and the brink of liquidation).

The money people seem to have no complaints(even though the operation is a nightmare). As long as these people see value in a merger they will continue to fund them-liquidation is a loss for everyone with no money to be made(see US Airways BK#2).

We were of more value merging then liquidating and it worked. Mergers are a way to make even more money.
 
I disagree with the premise that the bungled HP/US acquisition/merger proves that mergers don't work; IMO, the bungled US deal only proves that US management isn't up to the task of running a large airline.
Whereas this merger looked very promising AT The Beginning (and by all accounts it should have been), this Management has taken countless missteps (hell I lost count of all of them), alienated their employees and treated their customer base like pondscum. I have been very fortunate to work with great coworkers over the last couple of months inspite of their nonsense from Tempe but I can honestly say NONE of US would give a flying crap whether any one of them choked on a turkey over the Holidays. (And the pax......their comments aren't fit to print. They are laughable though).
 
Sounds like swan song time.

They gave it the college try and for a short time it was a b1thcin wave. But now everything adds up to the impossible task of mixing oil and water into a homogeneous solution.

Ooops. Did their best.. time to break it up and add the smaller pieces to the other carriers... after all mergers are good in the short term so it is time to admit the usefulness is over and repeat the lather rinse cycle.
 
What the industry is needing is a merger like the one the US/DL merger would have provided which despite what Tempe says had to have resulted in some hub closures. Face it CLT would have been toast in favor of ATL for the most part and despite the fact that it would have left a lot of people without a job and reduced a lot of nonstops in CLT, yeah maybe WN would have picked up about 5-10 gates and 20-45 flights but it would have reduced the number of flights available on the east coast, reducing supply thus increasing fares.... atleast that's what the money folks are hoping for because the economy is not getting any better and unless we get radically different leadership in this country oil is going to not go down ever anytime soon.

The US/HP merger did not reduce capacity very much, there was little overlap in routes.