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US Airways Could Prosper Without Merger, Analyst Says

CHARLOTTE, N.C. ( TheStreet) -- US Airways (LCC) shares were higher in premarket trading Tuesday after an analyst upgraded the stock, saying it is worth buying even if a planned merger with American (AAMRQ) isn't approved.

JP Morgan analyst Jamie Baker upgraded both Delta (DAL - Get Report) and US Airways to outperform, and also raised estimates for both carriers, saying that "firm revenue per available seat mile and retreating oil bode well for 3Q13 earnings." He also said that US Airways and American could form a working relationship, including the move of US Airways from the Star alliance to the Oneworld alliance, even if the Justice Department succeeds in blocking the merger.

Baker ascribed a 50-50 probability to the completion of the merger between US Airways and American. He said he doesn't expect a negotiated settlement, meaning the decision on a merger rests with U.S. District Court Judge Colleen Kollar-Kotelly, who has scheduled a hearing for Nov.25.

Why 50-50? Because while nearly every single person in the airline industry believes a merger is likely, "when it comes to antitrust experts, we have yet to find any that believe the airlines face anything but a steep, uphill battle, with most citing probabilities below 40%," Baker said. "We agree with the former, but we simply cannot ignore the latter, so let's call it 50-50."

That means it is wise to consider Plan B. "While neither (airline) is likely contemplating a Plan B at this time, we can envision an outcome that -- while failing to deliver more than a fraction of the proposed benefit for shareholders, passengers and communities -- nonetheless represents an outcome better than doing nothing or reverting to AMR's original solo plan," Baker said.

Besides US Airways' move to Oneworld, the Plan B scenario envisioned by Baker includes some major changes. American senior management -- including CEO Tom Horton -- would be replaced, "satisfying labor's desire for executive changes and assuaging investor concerns over excessive growth." American and US Airways would "pursue a high degree of domestic code-sharing, with Alaska (ALK - Get Report) potentially dropped as an American partner over time."

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