American Needs US Air Merger: Analyst

CHARLOTTE, N.C. ( TheStreet) -- Despite its obvious reluctance, American ( AMR) needs a merger with US Airways ( LCC) so that it can compete effectively in the transatlantic market, says a veteran airline analyst.

In a recent report, Avondale Partners analyst Bob McAdoo wrote that the value of US Airways' Philadelphia hub as a collector for European traffic has been widely overlooked. In fact, McAdoo said, "by the numbers, US Airways' Philadelphia hub is the most effective collector of traffic out of the north and eastern U.S. to Europe, surpassing the productivity of even Continental's ( CAL) Newark hub.
US Airways American Airline

"Contrary to numerous analyst and press comments, US Airways' overall presence as an East Coast/transatlantic carrier is not meaningfully different in scope than that of Continental, Delta ( DAL) or United ( UAUA)," wrote McAdoo.

Philadelphia generates more European revenue each day than American's hubs at either New York Kennedy or Chicago O'Hare, and more connecting traffic per European destination that Continental at Newark, he said.

From Philadelphia, US Airways serves 80 domestic cities and 17 European cities. From Washington Dulles, United serves 74 domestic cities and 10 European cities. From Newark, Continental serves 72 domestic cities and 27 European cities. From New York Kennedy, Delta serves 44 domestic cities and 26 European cities. Also from Kennedy, American serves 17 domestic cities and nine European cities.
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Of course, one of those nine destinations is London Heathrow; American and partner British Airways dominate this most valuable transatlantic route. But McAdoo said this fact contributes to the false perception that their Oneworld alliance has a strong transatlantic presence. In fact, he said, without Philadelphia, Oneworld trails badly in East Coast transatlantic markets, holding only 50% of the capacity of the Star Alliance and just 60% of the capacity of SkyTeam. Over half of U.S. traffic to Europe originates in the eastern third of the U.S., the area north of the Carolinas and east of Michigan.

"If alliances exist, among other reasons, to offer seamless travel from anywhere in the U.S. to anywhere in Europe, Oneworld is clearly deficient," McAdoo wrote. "However, combining US Airways and American would create a Oneworld North Atlantic network competitive with the Star and SkyTeam offerings.

"Some analysts and the press have termed US Airways as an unattractive merger partner, citing a somewhat smaller overall presence internationally," he said. " But US Airways' network and its European presence could be a nice addition to someone's existing larger network.

How valuable? "We believe adding US Airways' Philadelphia hub alone would add more daily connecting revenue to the American system than Japan Air Lines does from all of Asia," he said.

While American has expressed precisely zero public interest in a merger , McAdoo notes that in 1993 partner British Airways paid $400 million for 25% of US Airways, an arrangement that continued until 1997.

McAdoo noted that US Airways should earn $2.55 a share in 2010 and set a price target of $18, or about seven times earnings. His report, released Tuesday, likely contributed to the sharp rise in US Airways stock on Wednesday. In early afternoon trading, shares were up nearly 10% to $8.58 a share.

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