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Assessing the Ins and Outs of the American/US Airways Merger

CHARLOTTE, N.C. (TheStreet) -- Investors liked what they heard on Tuesday from newly merged American Airlines  (AAL - Get Report), which said its 2014 unit revenue gains will exceed competitors' because it will find merger synergies, put more seats on existing airplanes and perhaps reclaim lost corporate travelers. The carrier also hinted that it is likely to pay a dividend in the future.

American shares gained nearly 6% on Tuesday, closing up $1.78 at $31.96.

"We still have to prove it but I think we will outperform the industry this year on (revenue per available seat mile)" said President Scott Kirby, on the carrier's first earnings call following its Dec. 9 merger with US Airways.

In the fourth quarter, American posted a RASM gain of 5% gain, compared with 3% at Delta (DAL - Get Report) and 3.2% at United (UAL). American projected a 2% to 4% gain in the current quarter. "We are already realizing synergies," Kirby said. "I think that is going to accelerate as we go through the year."

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Among the factors fueling RASM gains, American will add seats on three aircraft types. Seat count on the MD-80s has already increased to 140 from 135. Boeing 737-800s will go from 150 to 160 or 164 in the second half of 2014. On the 777-200s, the seat count will increase from 247 to between 260 and 289 in 2014 or 2015. An increase in seat count "is very P&L positive," Kirby said. The cost for extra seats is "very low."
Additionally, American expects it will be able to staunch the flow of corporate passengers to other airlines, which benefited competitors particularly Delta. "I think we will win share back by virtue of the network we now have," Kirby said. "We will win some of American's natural share back." He noted, however, that assumptions about recovering share are not built into American's guidance.

In another change, American intends to reorganize its flight banks at its hubs, starting with Miami. In general, it will alter schedules and better size aircraft to routes. The change will be most pronounced in smaller markets, such as Texas cities Lubbock or Abilene, where some regional routes will draw 70-seat aircraft to replace 50-seat aircraft. Charlotte could get more flights to Midwest cities that have American service but not US Airways service.

Another positive for shareholders is that CEO Doug Parker acknowledged that the carrier's year-end cash and investment holdings of $10.3 billion are probably too much. "We agree (that) holding more cash than the company needs is not a good use of shareholder capital," Parker told JPMorgan analyst Jamie Baker, who questioned whether cash would be returned to shareholders.

Baker recently wrote a report about his expectation that American will eventually move to pay dividends. "We understand the point and share the view you have that there is no reason to hold more cash than we need," Parker said.

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