American Airlines Seen Buoyed as CEO Dodges Merger SnagsMary Schlangenstein
American Airlines Group Inc., formed today when AMR Corp. and US Airways Group Inc. combined, is poised to rise on confidence that the world’s largest carrier can avoid the pitfalls that dragged down other mergers.
The stock may reach $39 by 2015, estimated Hunter Keay, a Wolfe Research Inc. analyst, while Jamie Baker of JPMorgan Chase & Co. sees Fort Worth, Texas-based American rising to $37. Trading under the ticker AAL, the shares rose 2.7 percent to $24.60 at the close in New York from an opening price of $23.95.
Doug Parker took the helm as chief executive officer with lessons learned in creating the current US Airways in a tie-up with America West Holdings Corp. in 2005. As he seeks $1 billion in new revenue and savings, he plans to smooth technology bumps by using the reservation system at AMR’s American, the bigger airline, and has union accords in place to ensure labor peace and predictable costs.
“They are in a good position,” Savanthi Syth, a Raymond James Financial Inc. analyst, said in an interview. “That’s not to say they won’t have any hiccups, but they have their own merger experience and they’ve watched what’s worked and hasn’t worked for others. They will be a formidable competitor.”
The new company’s market value at day’s end was $18.6 billion, trailing only Delta Air Lines Inc.’s $24.7 billion in the U.S. industry, according to data compiled by Bloomberg. More than 42 million shares changed hands today, the data show.
Closing the merger capped AMR’s emergence from two years in bankruptcy protection, and CEO Tom Horton stepped aside to become chairman until the first annual meeting. The new American will operate 6,700 daily flights to 336 locations in 56 countries, with a fleet of 1,511 mainline and regional jets.
“Today is a big day of celebration,” Parker said after a rally with employees at American’s Fort Worth headquarters. “It’s great for employees. All we’re going to do today is celebrate. We’ll go to work tomorrow.”
He was joined at the event by Horton and former American CEO Robert Crandall, along with other executives of the combined company and union leaders who backed the merger. Workers packed a large room to cheer and ring bells as Parker rang the Nasdaq opening bell.
The US Airways team already has made changes, starting with eliminating assigned parking spaces for executives and a security guard outside the executive suites.
Parker, 52, said last week he hopes to beat his $1 billion goal. That sum matches Delta’s initial 2008 target in buying Northwest Airlines Corp., and trails the $1.1 billion to $1.2 billion sought in the 2010 merger creating United Continental Holdings Inc. from UAL Corp. and Continental Airlines Inc.
“We all acknowledge we’re not the greatest company in the world now,” Parker said after the festivities. “We’re not where we want to be. The company just emerged from bankruptcy. But we have the right people in place and a platform to get it done.”
United and Delta, now the world’s biggest airlines, both suffered merger-related bumps.
Delta tumbled 37 percent in seven trading sessions after announcing the Northwest deal as investors faulted its synergy goal as too little, and it later raised its sights to $2 billion. Last month, United set a cost-cutting goal of $2 billion by 2017 after posting the sixth-best return among 10 carriers in the Bloomberg U.S. Airlines Index.
American expects to replicate the financial performance of the merged US Airways-America West, which “outperformed the industry from day one,” according to US Airways President Scott Kirby, who will take that role at the combined carrier. The airline should lead U.S. competitors in returns and other financial metrics in less than three years, he said.
“What investors care about is our financial performance,” Kirby, 46, said in a Dec. 6 interview. “I feel pretty confident we can deliver again.”
Parker and Kirby have seen their own integration setbacks. Tempe, Arizona-based US Airways still lacks a unified contract for pilots from its two predecessors, and the 2007 post-merger switch to a single reservation system included computer faults that delayed flights and shut down airport kiosks.
“We learned a lot,” Parker said in a Dec. 4 interview. “I’m reluctant to say we have it figured out. We’ve had the benefit of each doing one ourselves, and we have seen others and the successes and challenges they’ve had. We’ve studied those and are trying to make sure we get the best practices in place.”
US Airways traded at a discount to Delta and Chicago-based United last week in part because of “overhyped and oversimplified integration fears” about the American tie-up, Keay said in a note to investors. Keay, who is based in New York, rates American as outperform.
United still hasn’t reached combined contracts with all of its work groups, and suffered computer-system failures and flight delays stretching into 2012. Those reverses “have soured the confidence of many investors,” JPMorgan Chase’s Baker said in a Dec. 5 note.
“We see cause for optimism” with the new American, wrote Baker, who is based in New York. He doesn’t have a recommendation on American, and neither did Raymond James’s Syth, who is based in St. Petersburg, Florida.
Parker disclosed to American employees that the carrier’s board had awarded him 627,000 shares valued at $15.4 million at today’s closing price. Other officers also received awards contingent on them staying at the airline until the end of 2015, with half earned only if American meets certain integration milestones.
The new American was created with creditors, employees and other stakeholders of the predecessor airline getting 72 percent of the combined company, with the rest going to US Airways shareholders. Holders of US Airways, which closed last week at $22.55, received shares of American in a one-for-one exchange.
US Airways gained the support of American’s unions for the merger four months after beginning its pursuit of the carrier, and secured preliminary contract agreements that provide for raises starting today.
The pilot agreement sets a timetable and method to mesh seniority lists, the pivotal issue for unionized captains and first officers and the one that has kept employees for America West and US Airways from moving to one contract.
“People are going to be watching us from day one,” Kirby said. “We have high expectations from our employees for sure, from investors and our customers, and that’s fair. I don’t think people are going to give us a lot of slack if we don’t deliver.”