CHARLOTTE, N.C. (
shares were higher in premarket trading Tuesday after an analyst upgraded the stock, saying it is worth buying even if a planned merger with
( AAMRQ) isn't approved.
JP Morgan analyst Jamie Baker upgraded both
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
potentially dropped as an American partner over time."
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
, which already possess the global route networks a merged airline would have, are no better than margins at smaller airlines US Airways, Alaska,
"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
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.
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