Lampshade
Well-known member
- Joined
- Feb 3, 2002
- Posts
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J.P. Morgan Invetment Report - April 21, 2008
U.S. Airlines : United-US Airways: 3rd Time's The Charm?
Reports that United & US Airways continue to discuss a potential merger did not generate a single investor inquiry for us. Meanwhile, the furious speculation surrounding Continental-United continues. While we are steadfast in our view that the value of consolidation is best measured by the savings from flying less, we actually see considerable merit to a United-US Airways combination, including the removal of uncertainty as to whether United’s team would cede the level of control we believe Continental would insist upon.
Pilot Perspective – DAL had to purchase its pilot waiver in order to proceed, through a combination of wage and equity. CAL & UAUA have disparate wage structures with no existing code-share flexibility, suggesting requisite permissions may prove expensive. But UAUA & LCC contracts require no such waivers, and wages are already closely aligned. We envision no wage bump or equity, though longer-term labor cost advantages are unsustainable.
Fleet Perspective – DAL-NWA have disparate fleets, with similar Airbus/Boeing conflicts at CAL-UAUA. But save for 9 A330s, LCC doesn’t fly a single type UAUA doesn't (though engines are not perfectly aligned).
Capacity Perspective – LCC is beholden to a minimum fleet size of 322, about 20 fewer than today. But we estimate UAUA could shrink close to 15% (independent of M&A) before hitting EBIT-adjusted flying minimums. And both managements have proven aggressive when it comes to cuts, whereas Continental has been a laggard in this regard.
Alliance Perspective – UAUA-LCC doesn't rock the alliance boat. And we continue to cling to the unpopular belief that continued SkyTeam allegiance could prove a source of incremental liquidity for Continental.
Regulatory Perspective – Concentration at DCA could prove problematic. But our Principle of Consolidation Number Eight has long been the involvement of AirTran or JetBlue in hopes of currying regulatory favor and perhaps contributing capital.
Third Time’s The Charm? United was interested in America West in 1998, US Air in 2000. Today, both are available under one roof.
Finally, What’s Best for United? While we’ve criticized certain United policies in the past (its dividend, for example), there’s no doubt in our minds that United prioritizes owners over its other constituents to a greater degree than most in the industry. And this is how it should be, in our view. Rather than structure a deal that potentially affords disproportionate benefit for CAL shareholders, United management may instead place greater emphasis on an LCC transaction, given its highly depressed share price.
U.S. Airlines : United-US Airways: 3rd Time's The Charm?
Reports that United & US Airways continue to discuss a potential merger did not generate a single investor inquiry for us. Meanwhile, the furious speculation surrounding Continental-United continues. While we are steadfast in our view that the value of consolidation is best measured by the savings from flying less, we actually see considerable merit to a United-US Airways combination, including the removal of uncertainty as to whether United’s team would cede the level of control we believe Continental would insist upon.
Pilot Perspective – DAL had to purchase its pilot waiver in order to proceed, through a combination of wage and equity. CAL & UAUA have disparate wage structures with no existing code-share flexibility, suggesting requisite permissions may prove expensive. But UAUA & LCC contracts require no such waivers, and wages are already closely aligned. We envision no wage bump or equity, though longer-term labor cost advantages are unsustainable.
Fleet Perspective – DAL-NWA have disparate fleets, with similar Airbus/Boeing conflicts at CAL-UAUA. But save for 9 A330s, LCC doesn’t fly a single type UAUA doesn't (though engines are not perfectly aligned).
Capacity Perspective – LCC is beholden to a minimum fleet size of 322, about 20 fewer than today. But we estimate UAUA could shrink close to 15% (independent of M&A) before hitting EBIT-adjusted flying minimums. And both managements have proven aggressive when it comes to cuts, whereas Continental has been a laggard in this regard.
Alliance Perspective – UAUA-LCC doesn't rock the alliance boat. And we continue to cling to the unpopular belief that continued SkyTeam allegiance could prove a source of incremental liquidity for Continental.
Regulatory Perspective – Concentration at DCA could prove problematic. But our Principle of Consolidation Number Eight has long been the involvement of AirTran or JetBlue in hopes of currying regulatory favor and perhaps contributing capital.
Third Time’s The Charm? United was interested in America West in 1998, US Air in 2000. Today, both are available under one roof.
Finally, What’s Best for United? While we’ve criticized certain United policies in the past (its dividend, for example), there’s no doubt in our minds that United prioritizes owners over its other constituents to a greater degree than most in the industry. And this is how it should be, in our view. Rather than structure a deal that potentially affords disproportionate benefit for CAL shareholders, United management may instead place greater emphasis on an LCC transaction, given its highly depressed share price.
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