by A. Luttenegger ashley@mergers.com and J. Richardson jenna@mergers.com

American Airlines, once a legendary American carrier originally created from 82 small airlines in 1930, filed for bankruptcy in November 2011. Although American survived without government help longer than it’s competitors, United and Delta who filed for bankruptcy in 2002 and 2005, respectively, its circumstances have created unhappy passengers and employees alike. Quickly, American Airlines jumped from leading the airline industry in revenues for 2007 to the third spot in 2010. With cancelled and delayed flights prominent in the past few months, the airline is quickly spinning into turmoil. American Airlines has two options: liquidate or merge with U.S. Airways in an attempt to reemerge as a competitor against Delta and United.

U.S. Airways, a company’s whose stock price has had a wide range of $3.96-$14.51 within the last 52 weeks, could extremely benefit from a merger with American Airlines especially while the airline is under Chapter 11 bankruptcy protection. U.S. Airways could potentially see an immense in increase profits and reduced costs, in turn increasing efficiency. Since the Delta/Northwest Airlines merger in 2008 and the United/Continental merger in 2010, U.S Airways has revenues amounting to nearly half of each of these two companies. Simply eliminating competition through creating a mega-airline, comparable to Delta, will immediately increase profits and form the single largest airline in the world.
US Airways would likely see its risk, and thus, cost of capital increase. Consequently, its value would decline. The increased risk would stem in part from its entry into new markets. American currently has operations in the Americas, Europe, and Asia, whereas US Airways currently operates in only the Americas and Europe. A merger would expose US Airways to risks associated with doing business in more countries with political and economic instability.
So what does this mean for employees, customers and shareholders? U.S. Airways employees based in Phoenix risk major lay-offs due to the fact that the headquarters of the new mega-airline will be located in Dallas Fort Worth, TX. The merger will aim to cut costs; certain fixed costs (fixed with respect to ticket sales) such as some pilot salaries and operating leases could be eliminated. The associated human cost must be taken into consideration. If the merger would cause many employees to lose their jobs during a time of economic uncertainty, it may face public resentment, perhaps ultimately inhibiting its ability meet revenue projections. Customers would see a complete about-turn in service and extremely less delayed flights because as the world’s largest airline, maintaining face is important for both customer satisfaction and efficiency. A careful, detailed analysis of these costs and benefits should be performed in order to decide whether the merger would truly maximize shareholder value in the long run.