American Is Doing Great But US Airways Merger Still Needed, CEO Says

DALLAS (TheStreet) -- American Airlines (AAMRQ) is in a tough position, doing fine on its own yet saying it needs a merger with US Airways (LCC).

American announced on Wednesday two new Dallas-Asia routes, and on Thursday it reported a record quarterly profit, leading one to question whether American can't prosper all by itself.

"Of course," said CEO Tom Horton in an interview. "You just have to look at the results. American has been very successful. (But) it will have a stronger network and be more competitive globally with a merger."

Obviously, American has proven that it reorganized successfully in bankruptcy court. "There were those who didn't think that would be the case," Horton said. "We never doubted it. People have been working very hard here over the last couple of years to achieve this."

The quarter produced a net profit of $530 million, excluding one-time reorganization costs. Revenue rose 6.2% to $6.8 billion, the highest quarterly revenue in American's history. Including items, the net profit was $289 million, compared with a loss of $238 million in the same period a year earlier. The pretax margin was 7.8%, representing the seventh consecutive quarter of improved pretax margins.

"It's improvement both on the top line and the cost line," Horton said. Of course, the airline operating environment is strong, but "it's a little more than the environment," Horton said. "We've been working hard to improve the product, with all the new airplanes; we've been working very hard on the network, and we've been expanding and growing partnerships. (It's) all those things, taken together."

Horton continued to maintain that American is open to a settlement with the Department of Justice, which has sued to block the merger. That case is scheduled to be heard in U.S. District Court in Washington starting Nov. 25.

"We are open to a sensible and common sense settlement from Department of Justice," he said. "We were able to sit down with the Texas attorney general and find significant (common ground.) That is the right template for the Department of Justice." He declined to comment specifically on the possibility of a settlement.

Texas Attorney General Gregg Abbott now backs the merger, which he had previously opposed.

Texas Congressman Marc Veasey, one of 68 Democrats who signed a letter to President Obama advocating for a merger, said Thursday that the Department of Justice should consider the impact on workers if the merger does not occur.

Veasey, whose Fort Worth district includes thousands of American workers, spoke at a rally last month, when unions at the two carriers blitzed Washington last month, staging a demonstration blocks from the Justice Department.

"I hope they are listening," he said, in an interview on Thursday. "Maybe someone at Justice may not have understood the impact (of stopping the merger) would have on union workers and on thousands of jobs. This is management and labor working together. Justice may not have had a good understanding that (its action) would create a duopoly."

Veasey said he would welcome a settlement, noting "That would be the easiest and best way to do it for workers and consumers."

Meanwhile, JPMorgan analyst Jamie Baker has boosted his estimate on the likelihood of a merger to 60% from 50%. This led him to raise his target price for stock in American shares to $9.50 and to upgrade his rating to overweight from neutral. In a report issued Tuesday, Baker wrote that he does not expect a negotiated settlement.

" Our skepticism is driven by the view that satisfying the entirety of DOJ's complaint would result in significantly diminished revenue synergies, to the point that costs would rise in a merger and little else," he said. "But relenting labor pressure coupled with the Texas Attorney General (and possibly others?) dropping out certainly can't hurt, in our view, and may ultimately cause DOJ to soften its position."

American isn't the only party that could do well if the merger isn't approved. Imperial Capital analyst Bob McAdoo has an outperform rating on US Airways and a $24 price target. He said a merger breakdown would likely represent a buying opportunity.

"If the proposed AMR transaction is ultimately abandoned, event-driven investors would likely exit the stock," McAdoo wrote in a report. "But since recent record operating results, even in light of a soft economic environment and with $100 a barrel oil, suggest strong 2014 free cash flow, we believe there will be meaningful renewed investor interest in a standalone US Airways."

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

>To contact the writer of this article, click here: Ted Reed

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