Airline Merger: Don’t Get (too) Carried Away – US Airways Group, Inc. (LCC)

What If?

Moreover, the merger of fleets takes time. Southwest Airlines Co. (NYSE:LUV) had acquired AirTran Airways back in 2011, but it was only last month that their fleets actually merged. Over the last 5 years, the EPS growth of Southwest Airlines shrank by nearly 8%, but it is now that analysts estimate a 30% plus annual EPS growth for the next 5 years. Moreover, if the restructuring of American Airlines takes longer than estimated, US Airways might be required to raise more capital. Its debt/equity ratio is already over 600% and analysts are not expecting a blockbuster FY13 either.

Foolish Conclusion

As a matter of fact, JPMorgan recently downgraded the shares of US Airways. But no damage has been done yet. Both the boards are still in advanced talks and I’m confident some crucial issues will be addressed before the merger. I believe that investors should not jump to conclusions and should wait for further announcements as its better to enter late than to catch falling knives. Since US Airways is already highly leveraged, its merger with American Airlines has not only amplified its rewards but also its risks. But investing in American Airlines would be a great idea, as it would have relatively easy access to funding without bureaucratic loops. Moreover, the deal in itself would unlock shareholder value.

The article Airline Merger: Don’t Get (too) Carried Away originally appeared on Fool.com and is written by Piyush Arora.

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