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TheStreet Open House

AMR-US Airways Merger Should Benefit Discount Airlines

NEW YORK ( TheStreet) -- In the short term, the shareholders of US Airways Group (LCC) have benefited greatly from its merger with American Airlines (AMR).

But in the long term, it will be the shareholders of Southwest Airlines (LUV - Get Report), Spirit Airlines (SAVE - Get Report), and JetBlue (JBLU - Get Report) who should gain the most. Mergers and acquisitions in any industry always benefit the companies that are well managed, and two of the best passenger air carriers are Southwest and Spirit Airlines. JetBlue should do well from acquiring the slots that US Airways must divest that comport well with its network of routes.

A major reason for the more than 70% rise in the share price of US Airways Group for 2013 is due to the merger allowing for higher ticket prices to be charged. About this, William Swelbar, a research engineer with the International Center for Air Transportation at MIT, noted in an interview with USA Today that " Mergers have allowed the removal of redundant capacity ... consolidation of service gives ... some pricing power.'' In other words, when the number of seats for passengers are reduced, the fares being charged will rise. While that will certainly increase revenue for US Airways Group, United Continental (UAL - Get Report), and others, it will also result in more passengers flying discount airlines.

That will increase the passenger traffic for Southwest Airlines, JetBlue and Spirit Airlines. There are two basic economic principles here: the elasticity of demand and substitution. When prices rise too much for a good or service, demand will fall as consumers seek alternatives in air travel, that is flying on such discount carriers as JetBlue, Southwest Airlines and Spirit Airlines.

That can be seen in the performance of the companies in the present era of rising ticket prices.

On a trailing-12-month basis, sales growth for Spirit Airlines is higher by 23.10% as to that from last year. JetBlue has a 10.60% increase. For the same period, it is up 9.10% for Southwest Airlines. US Airways has posted a 5.90% jump. It is 0.10% for United Continental Airlines. The industry average is a negative 0.10%.

In addition to having lower growth rates for sales, US Airways and United Continental have much, much more debt that Spirit Airlines and Southwest Airlines. The debt-to-equity ratio for US Airways is 3.93. That means that it required almost $4 in borrowing to produce every $1 of equity. It is almost twice as bad for United Continental, with a debt-to-equity ratio of 6.98. For JetBlue, the debt-to-equity ratio is 1.41.

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LCC $0.00 0.00%
JBLU $19.28 0.00%
LUV $44.24 0.00%
SAVE $76.64 0.00%
UAL $67.75 0.00%


DOW 17,712.66 +34.43 0.19%
S&P 500 2,061.02 +4.87 0.24%
NASDAQ 4,891.2190 +27.8570 0.57%

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