American Airlines-U.S. Airways Merger, Despite Turbulence, Will Get Done

NEW YORK ( TheStreet) -- American Airlines parent AMR ( AAMRQ) may be facing another wrench in the works of its merger agreement with US Airways ( LCC).

The Justice Department filed papers late Friday "objecting to certain employee wage increases, as well as a proposed $19.9 million exit package for AMR's chief executive," writes The Wall Street Journal. Tracy Hope Davis of the U.S. Trustee's office said in a court filing Friday -- the deadline for objections to the proposed compensation plans in the merger agreement -- that the company failed to explain "why the sweeping changes to their various employee compensation plans are permissible" under the U.S. bankruptcy code.

Well, nothing like waiting until the last minute.

Now all the momentum surrounding the American Airlines/US Airways merger could fall flat depending on what happens next regarding the Justice Department's objections to the proposed compensation plans in the merger agreement. On Monday, shares in AMR dipped from an open of $3.75 to a day low of $3.43 before recovering to a relatively flat price, while US Airways saw a small boost, around 2%, bringing the share price to an intraday high of $16.33, nearing its 52-week high of $16.54.

A U.S. Airways spokesperson confrims that analysts' average one-year price target is $19.32. I am confident it will reach that mark, if not pass it completely, but getting there may take a little longer as the merger details are ironed out again. A little patience will go a long way here. Even buying in at $16, if the company reaches the target price, investors would receive a better than 20% return. Just keep in mind, the stock will likely be a little volatile between now and then, so pay attention and look for those moments when momentum or enthusiasm is low.

AMR and U.S. Airways announced their merger in mid-February. It was touted as a way for AMR to exit bankruptcy protection, and the markets were abuzz with all that a merger of the two airlines could mean -- both for passengers and investors. Moody's cautioned that "the merger of American Airlines and U.S. Airways to form the world's largest air carrier threatens the credit quality of U.S. airports ... as the combined airline may eliminate routes or push up ticket prices." At the same time, Delta ( DAL), currently the second-largest carrier in the U.S. but would slip to third place after the American Airlines merger, announced upcoming service upgrades on popular routes in an effort to maintain its position.

In investing news, Jim Cramer recommended that investors buy into US Airways before the merger -- it is his first airline pick since 1985.

Cramer had this to say of the deal: After years of cut-throat competition that made the airlines simply un-investable, a string of mergers has taken away much of that competition, which may be bad news for travelers but is great news for stockholders.

There's a new world order, said Cramer, with the top four airlines now set to control 80% of all U.S. flights. That's why US Airways, which is set to merge with American Airlines when that company emerges from bankruptcy later this year, is worth getting in now, ahead of the deal. Once closed, the new American will be the largest airline in the world, said Cramer, and it will be No. 1 on the East Coast, No. 1 in middle America and No. 3 on the West Coast. With an estimated $1 billion in cost savings expected from the deal, Cramer said there's a lot to like about this combined behemoth. The day Cramer made his recommendation (March 5, 2013), the stock closed just over $14, and it has been creeping up since.

On Feb. 22, AMR and US Airways "filed a motion outlining some salary and benefit increases for AMR's nonunion customer-service, reservations and support employees, as well as for front-line management and senior executives," notes the Journal. "For the executives, the arrangements include incentive plans, awards related to the merger integration, severance benefits and a retention program." As part of this motion, AMR CEO Tom Horton was to receive a $19.9 million severance package comprising half cash and half stock in the new American Airlines Group in exchange for stepping down from his role as CEO in the third quarter, when the merger is expected to close, and taking on the role of nonexecutive chairman of the combined company until spring of 2014.

The papers filed by the U.S. Trustee on Friday "questioned whether the nearly $20 million payment to Mr. Horton is permissible under bankruptcy law, and pointed out that it is more than 10 times the amount of the mean severance pay to be given to nonmanagement employees."

I'm sure this will all blow over and arrangements will be made -- they almost always are. In the meantime, I recommend taking advantage of the delay in completing the merger that the Justice Department's objections to the proposed compensation plans in the US Airways/American Airlines merger agreement allows. Buy US Airways as soon as the momentum is down.

-- Written by Renee Butler in New York.

At the time of publication, the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Renee Butler is a freelance financial journalist based in Seattle. She has written hundreds of articles and blog posts on hedge funds, the financial markets, investing trends and company developments. Her articles have appeared on MSNBC, MarketWatch, the Motley Fool, The Street and Seeking Alpha, among others. Butler is a member of the National Press Club and the Society of Professional Journalists, and holds advanced degrees in business, financial management, psychology and sociology.