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American Airlines to Merge with U.S. Airways

LUV JBLU UAL

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The stage is finally set for American Airlines and U.S. Airways Group Inc. to merge, a move that has been contemplated by the former from the beginning of this year. Shareholders of AMR Corp., the holding company of American Airlines, remained bullish on the prospect of forming the world’s largest passenger carrier as the stock surged 7.5% on Friday trade on Nasdaq.

The U.S. airline giants are expected to finalize the collaboration before the market opens on Monday, which will place it ahead of industry leader United Continental Holdings Inc. (UAL - Analyst Report). The new company will be known as American Airlines and will trade under the ticker AAL on Nasdaq.

The companies got the nod for the merger after overcoming a series of legal hurdles. Both the carriers resolved all competition-related litigations raised by the Department of Justice (DOJ), along with attorney generals of six states and the District of Columbia in Aug 2013.

Further, American got the green signal from the U.S. bankruptcy court for its legal settlement with DOJ that will allow it to amalgamate with U.S. Airways. They also cleared a last ditch attempt raised by a customer group to block the deal by raising a possible fare hike issue post the merger.

However, as part of the deal, both the carriers will have to give up 52 take-off and landing slots at Washington’s Regan National Airport (DCA) and 17 pairs at La Guardia airport (LGA) in New York. Additionally, the carriers have to divest two gates and related facilities at each of the Boston, Chicago, Dallas, Los Angeles and Miami airports. The DOJ argued that opening up of slots to carriers will likely induce more competition within the industry.

The divesture has already begun with Southwest Airlines Co. (LUV - Analyst Report) and Virgin American winning slots at LGA. Another passenger carrier JetBlue Airways Corp. (JBLU - Analyst Report) is also vying to grab slots at DCA.  

Post-merger, the combined unit will likely have more than 6,500 daily flights to 336 destinations across 56 countries generating annual revenue of roughly $40 billion. As of now, the two airline behemoths will continue to book tickets under their own brand name. We believe that effects of the merger will be felt only when AMR Corp. gets a single operating license from the Federal Aviation Administrator.

Although the merged entity will have more pricing power and control over a large number of slots, we believe it will hardly affect the dynamics of the U.S. aviation industry, which will be dominated by the new American, United, Delta and Southwest with 80% share.

Currently, U.S. Airways Group Inc.has a Zacks Rank #2 (Buy).

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