Bloomberg News

American Record Profit Seen as Merger Gains Extend U.S. Revival

March 07, 2014

American Airlines Group Inc. (AAL:US) is heading for an annual profit analysts estimate at $3.5 billion, a record for the resurgent U.S. industry, as the carrier reaps merger benefits faster than in rivals’ tie-ups.

Less than three months after its creation, the world’s largest airline is poised to add seats on some jets and has almost finished a technology fix to let fliers book trips on both its American and US Airways units. Also in the works: more fee-based services such as early boarding and extra legroom.

Chief Executive Officer Doug Parker is seeking $1 billion in new revenue and savings by 2015, a speedier march toward that milestone than for Delta (DAL:US) Air Lines Inc. and United (UAL:US) Continental Holdings Inc. in the last major U.S. combinations. That puts American in the vanguard of a rebound for U.S. airlines after $53 billion in collective losses from 2001 through 2011.

Investors are taking notice, sending the stock up the most among U.S. peers since former parent AMR Corp. left bankruptcy and merged with US Airways Group Inc. on Dec. 9.

“It looks like it’s got more upside, so we’re in there,” said Jonathan Eng, portfolio manager at Los Angeles-based Causeway Capital Management LLC, which holds 2.35 million American shares and has $28 billion in assets. “They’ve done a good job so far, and they’ve got a lot of things still to do.”

The two airlines can’t fully mesh operations and fly as one carrier until receiving federal approval, which they are targeting for the second half of 2015.

Profit Estimate

The projected profit for Fort Worth, Texas-based American, the average of 11 estimates compiled (AAL:US) by Bloomberg and excluding some items, tops the $2.2 billion tally for Delta and the $1.7 billion for United. Earnings at that level would eclipse the U.S. industry mark, Delta’s $2.7 billion in 2013. For the nine major carriers with full 2013 results, profit on that basis was $7.4 billion, trade group Airlines for America said on March 5.

Casey Norton, a spokesman for American at public-relations firm Weber Shandwick, declined to comment on the 2014 outlook.

The American-US Airways integration began amid the winter storms that erased tens of thousands of U.S. flights since Dec. 1, with hubs in Chicago and New York among the hardest hit. American plans to report on cancellations next week in its February traffic results.

Parker, 52, is working to avoid competitors’ stumbles. United, for example, is still struggling to end computer failures after the 2010 tie-up between former parent UAL Corp. and Continental Airlines Inc. Neither Delta nor United got $1 billion in new revenue and savings by the second full year of their mergers, said David Fintzen, a Barclays Plc analyst.

Delta, United

When Delta bought Northwest Airlines Corp. in 2008, the stock slumped on concern that a $1 billion savings-and-revenue goal was too little. Three months later, Delta doubled the total to $2 billion, only to see the financial crisis choke off travel and losses (DAL:US) persist through 2010’s first quarter.

“It took Delta three years to get to $1 billion in revenue synergy and five years to get to the $2.5 billion I mark them at today,” said Fintzen, who is based in New York. “United, at the other extreme, is three-plus years now into its merger and still has a small revenue dis-synergy the way I calculate it.”

Most of American’s $1 billion goal for so-called merger synergies will be in revenue, about $900 million, according to the airline, whose changes include calibrating jet assignments to match demand so the planes on a given route are as full as possible. Separately, American envisions $400 million more in “annual earnings improvement” with moves such as raising the seat count on some models, President Scott Kirby has said.

More Revenue

American is upgrading technology to support “numerous” revenue-generating moves, Kirby told analysts on a Jan. 28 call. Among the steps are fee-based services such as more priority-boarding options and the adoption of American’s more-legroom coach seating on US Airways jets.

Analysts including Bob McAdoo at Imperial Capital LLC in Los Angeles and Morgan Stanley’s John Godyn say Kirby’s $400 million forecast may be too low. Their estimate: $1 billion.

“Those changes don’t require a merger,” McAdoo said in an interview. “It involves integrating a new management thought process.”

Posting any profit, much less a record, would be a victory for Parker after convincing bankruptcy creditors that he could lead a turnaround following AMR’s six straight annual losses. US Airways began angling for a takeover only weeks after the bigger airline sought court protection on Nov. 29, 2011.

Stock Rally

American’s $38.81 closing price yesterday capped a 58 percent rally since Dec. 9 and valued the company at $18.3 billion, second to Delta’s $30 billion. The Bloomberg U.S. Airlines Index rose 78 percent in 2013 after a 31 percent gain in 2012, and closed yesterday at the highest since April 2002.

Of 16 analysts tracking American, 12 rate the stock as a buy, including McAdoo. Barclays’s Fintzen is among three who say hold, and one says sell, data compiled by Bloomberg show.

Michael Derchin, a CRT Capital Group LLC analyst in Stamford, Connecticut, who recommends the shares as a buy, questioned whether American could find $1 billion in additional earnings power, a figure he said “seems very high.”

“I don’t think there would be any question American’s was the most successful airline bankruptcy,” Derchin said in an interview. “That was the old American management doing that. I’m skeptical about a lot of low-hanging fruit being left.”

Parker publicly established the merger’s tempo by moving top executives from Tempe, Arizona-based US Airways into American’s headquarters before the deal closed. That contrasted with Delta CEO Richard Anderson’s 2008 decision to deploy then-Chief Financial Officer Ed Bastian as interim CEO at Northwest.

Booking Trips

The new American also is ahead of the pace set in rivals’ mergers in linking computer systems so that the old American and US Airways can book fliers onto each other’s planes, said Bob Mann, a former American executive who now runs aviation consultant R.W. Mann & Co. of Port Washington, New York.

The so-called code sharing is in place everywhere except for some international markets where American awaits regulatory approval, Todd Lehmacher, a spokesman, said on March 5. Kirby has said code sharing will produce about a third of the $900 million in revenue under Parker’s $1 billion synergy goal.

Parker and his lieutenants are getting a boost from an early start to integration planning, beginning within two months of the airlines’ February 2013 agreement to merge and running through a U.S. Justice Department lawsuit challenging the deal that was settled in November.

Some of their lessons were learned earlier. Parker was CEO of America West Holdings Corp. in 2005 when he engineered the combination of that carrier with US Airways’ predecessor.

Parker and Kirby also had a chance to watch the tie-ups of Delta and United, as well as Southwest Airlines Co. (LUV:US)’s 2011 takeover of AirTran Holdings Inc. Southwest, which prides itself on flying only Boeing Co. 737 jets and shunning most extra fees, is still unloading AirTran’s Boeing 717s and undoing that unit’s extra charges.

“They definitely had a benefit from their own experience and close observation of these other companies,” Derchin said. “There was a lot to observe in terms of trying to figure out what are the right business practices and what is wrong.”

To contact the reporter on this story: Mary Schlangenstein in Dallas at maryc.s@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net


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Companies Mentioned

  • AAL
    (American Airlines Group Inc)
    • $42.38 USD
    • -0.10
    • -0.24%
  • DAL
    (Delta Air Lines Inc)
    • $37.68 USD
    • 0.53
    • 1.41%
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