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US Airways Could Prosper Without Merger, Analyst Says

Additionally, Baker's Plan B envisions that "US Airways pilots don't get marked to market so costs remain intact." That would come as a shock to the US Airways pilots, both east and west, who have below-market contracts and were due for improvements worth $1.6 billion over six years that would be triggered by a merger.

Plan B brings no cost synergies, Baker said. But it does not require Justice Department approval. "It's not great -- not by a long shot -- but it beats the two airlines sulking and retreating into separate corners," he said. Additionally, he noted that margins at Delta and United (UAL - Get Report), which already possess the global route networks a merged airline would have, are no better than margins at smaller airlines US Airways, Alaska, Allegiant (ALGT) and Spirit (SAVE) .

"One reason US Airways is successful is that it is focused on being the dominant operator in smaller markets, letting others battle for LAX and NYC dominance, while preferring instead to seek profits in Charlotte and elsewhere," Baker wrote.

Explaining his upgrades, Baker said August RASM exceeded his expectations, September RASM looks similar, oil prices are retreating, Delta has joined the S&P 500 index, and stocks have held up better than anticipated following the surprise Aug. 13 announcement that the Justice Department would sue to block the merger. Also, he said, US Airways' "stand-alone prospects are better than implied by the market -- Delta is trading at roughly 10x 2014E earnings, (with) US Airways at 5x."

Baker raised his price target for US Airways to $26 from $18, while raising his rating to overweight from neutral. He raised his price target for Delta to $26 from $22, again raising his rating to overweight from neutral.

US Airways closed Monday at $18.07, and was trading at $18.52 in premarket trading. Delta closed Monday at $23.15 and was trading at $23.73 in the premarket.

-- Written by Ted Reed in Charlotte, N.C.

>To contact the writer of this article, click here: Ted Reed

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