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The Deal: AMR's Quarterly Profit Soars

NEW YORK (The Deal) -- The parent of American Airlines Inc., which will head to court next month to try to win approval for its merger with US Airways Group Inc., on Thursday, Oct. 17, reported quarterly results that show the company hitting cruising altitude flying solo. 

AMR Corp. reported net income of $289 million in the third quarter, an improvement over a loss of $238 million during the same three months a year prior. The company, which is in Chapter 11 protection, said that excluding bankruptcy-related charges and other items it would have made $530 million, the highest quarterly net profit in company history. 

"Continued execution on our product, network and alliance strategy, combined with cost efficiencies from restructuring and fleet renewal, creates strong momentum towards our planned merger with US Airways," company chairman and CEO Tom Horton said in a statement. AMR, according to Horton, set aside $59 million during the quarter with "expectation of making our first profit-sharing payout since 2001" to employees. 

But the positive results could further complicate AMR's effort to win approval of its planned $11 billion merger with US Airways. The two companies in February announced plans to combine into what would be the world's largest carrier, but that deal was thrown into doubt in August when the Department of Justice filed suit seeking to block the combination on antitrust grounds. 

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The DOJ in building its case against the deal is relying in part on comments from AMR executives from prior to the merger announcement saying that the airline could survive and prosper on its own. 

A strong quarter and massive cash balance only reinforce the argument that American, thanks to its restructuring, should be able to go it alone. 

The airlines have countered that while in the short term they can compete, over the long haul they lack the global scale necessary to compete with larger rivals United Continental Holdings Inc. (UAL) and Delta Air Lines Inc. (DAL)

Though antitrust attorneys say the government could have a solid case, the financial community is increasingly betting on the airlines to prevail. JPMorgan Chase & Co. analyst Jamie Baker on Thursday upgraded AMR's shares to overweight and boosted the likelihood that the merger goes through to 60% from 50%. 

Earlier this month Wolf Research LLC analyst Hunter Keay estimated the airlines have a 75% chance of winning in court. Unlike in many bankruptcies, AMR shareholders are expected to avoid being wiped out entirely when the company emerges from Chapter 11 protection. 

John D. Godyn at Morgan Stanley (MS) remained more cautious about the airlines' chances, putting the odds that the companies will succeed at 42.5%. 

Baker in his note said that AMR's prospects are looking up even if the airlines do not prevail at trial. The analyst said that the company's shares could be worth as much as $15.50 each if a deal goes through, and perhaps $3.50 absent a merger. 

"Industry fundamentals are robust, certainly exceeding those envisioned around the time of AMR's original stand-alone ambitions," Baker wrote.

Written by Lou Whiteman

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