After the Department of Justice challenged the merger between US Airways Group Inc (NYSE:LCC) and American Airlines parent AMR Corporation (OTCMKTS:AAMRQ), shares of both airlines sold off in a spectacular fall that had both carriers down by double-digit amounts. With a merger, the new American Airlines Group was expected to be highly profitable, benefiting current shareholders of both airlines. However, in light of this recent sell-off, shares of US Airways Group Inc (NYSE:LCC) look attractive even if this merger ultimately fails.
Earnings power
US Airways Group Inc (NYSE:LCC) may be the smallest of the remaining legacy carriers but that has not stopped it from being profitable. Like all legacy carriers, US Airways Group Inc (NYSE:LCC)’ earnings rebounded strongly out of the recession despite not having a merger partner.
Today, earnings stand around $3 per share giving the airline a P/E ratio of only a little more than five times. Typically, such a P/E ratio is only given to companies with a perpetually declining business model and US Airways Group Inc (NYSE:LCC) is far from that. In fact, looking forward there are some meaningful opportunities for the airline.
Route network
Compared to the mega carriers resulting from the merger, US Airways route network is far smaller, especially internationally. But airline alliances help the airline to make up for some of this disadvantage. US Airways is a member of the Star Alliance that also includes the world’s largest airline (and major rival) United Continental Holdings Inc (NYSE:UAL). United Continental’s route network is quite extensive and the setup of airline alliances allows US Airways to sell seats on UAL flights and vice versa.
Ever since United and Continental merged, US Airways Group Inc (NYSE:LCC) has been the small American airline in the alliance. While the Star Alliance (and United Continental Holdings Inc (NYSE:UAL)) still benefits from having US Airways operate flights within the alliance, United Continental did not been register any major disappointment with the US Airways- AMR Corporation (OTCMKTS:AAMRQ) merger that would have seen US Airways join American Airlines’ OneWorld Alliance.
This is quite likely due to United Continental Holdings Inc (NYSE:UAL)’s view that further industry consolidation means more than keeping the smallest legacy airline in the Star Alliance. And it appears the market agrees with United Continental Holdings Inc (NYSE:UAL)’s sentiment as the DOJ challenge to the merger sent its shares down along with the broader market.
However, even if the merger fails, US Airways could still have the chance to pick up pieces of American Airlines if the bankrupt carrier decides to slim down in an effort to restructure. While the sale of certain assets would be monitored by regulators, US Airways could still pick up pieces that expand its route network while not necessarily monopolizing any particular airports or routes.
Book value and cash
With both a positive book value and tangible book value, US Airways compares favorably to other legacy carriers. United Continental Holdings Inc (NYSE:UAL)’s tangible book value is less than zero and the airline trades at a much higher P/B ratio than US Airways. Delta Air Lines has negative values for both book value and tangible book value making it the least attractive in this comparison.
US Airways has also built an impressive cash position with nearly $20 per share in cash. Of course the airline still has billions in debt (like all legacy carriers) but the liquidity provided with this cash compares favorably with United Continental Holdings Inc (NYSE:UAL) and Delta’s cash per share.
It’s not over yet
While much of the public believes the US Airways-AMR Corporation (OTCMKTS:AAMRQ) merger has been killed, investors should know that there is still a court battle and more negotiations to wade through before this corporate drama is over. If the merger is eventually approved, US Airways shares have major upside potential based around the market’s valuation prior to the DOJ challenge. But even if the merger does die in court or over the negotiating table, US Airways still offers significant value in its P/E ratio and a favorable book value and cash position. With the added potential to expand its network by acquiring sold off American Airlines assets, I believe US Airways shares have significant upside, merger or no merger.
The article This Airline’s a Good Value, Merger or No Merger originally appeared on Fool.com is written by Alexander MacLennan.
Alexander MacLennan owns shares of Delta Air Lines and Air Canada (a Star Alliance member). He is also long the following options: $22 JAN 2015 Delta calls, $25 JAN 2015 Delta calls, $30 JAN 2015 Delta calls, $17 JAN 2015 US Airways calls. The Motley Fool has no position in any of the stocks mentioned.
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