4 New Suitors for American Airlines

The airline industry is awaiting another major consolidation. American Airlines, a subsidiary of AMR Corp. (AAMRQ) is evaluating its merger proposal with the fifth largest U.S. airline US Airways Group Inc. (LCC - Snapshot Report).

Now, according to Reuters, four other candidates - JetBlue Airways Corp. (JBLU - Analyst Report), Alaska Air Group (ALK - Snapshot Report), Frontier Airlines, a subsidiary of Republic Airways Holdings (RJET - Snapshot Report) and a privately held Virgin America have expressed interest to be the merger partner.

After seven months into bankruptcy restructuring, the third largest U.S. air carrier has improved its revenue and reduced costs to a certain extent. The company is progressing well with the labor union negotiations aimed at generating more than $1 billion in annual cost reductions.

Now, American Airlines together with its creditors will carefully review all the strategic alternatives that could make the airline even stronger. The team would evaluate synergies, costs, and tax and capital structure that would be generated from each merger.

JetBlue and Alaska have wide networks on the East and West Coast, respectively. The merger with these two carriers do not appear lucrative as American Airlines already has partnerships with them, providing services in cities like New York and Los Angeles.

American Airlines could get a strong foothold in Denver by merging with Frontier. However, United and Southwest already have a strong presence in the city, which is not large enough to support the three major airlines. The next alternative, Virgin America is struggling with losses and has a huge debt in its balance sheet. As result, American Airlines may scrap this option altogether.

So, we see American Airlines-US Airways as the hottest pair in the industry as it will be in the best interest of the customers. Two months ago, the three labor unions of American Airlines supported a merger with US Airways.

The combination would be strong enough in scope and size to compete with their larger rivals, United Continental Holdings Inc. (UAL - Analyst Report) and Delta Airlines Inc. (DAL - Analyst Report). In fact, the combination would create an airline identical to the largest U.S. air carrier, United Continental, in terms of revenue and traffic, and would be better than the second largest airline, Delta.

This is an opportune moment for American Airlines to regain its lost profits and operational efficiency. As United and Delta will be long-term beneficiaries following the merger actions on both capacity and cost fronts, we believe American Airlines will also emerge as a successful candidate by balancing its debt level and lowering costs.

American Airlines currently has a Zacks #2 (Buy) Rank for the short term (1–3 months).