AAMRQ, LCC, JBLU: Airline Stocks Primed For Rebound – 6.04.12

By Brian Prescott
Jun 4, 2012 6:28:32 AM PDT

The US markets are likely to open down taking cues from Europe once again. It appears there is nothing else in the markets currently except negativity in varying degrees. However, value is created at times like these. While there are a number of examples of value destruction around these days, one example of value creation may be American Airlines and its parent AMR Corporation (PINK: AAMRQ). It is becoming increasingly clear that the company is headed towards a merger with rival carrier US Airways Group Inc (NYSE: LCC) to reduce expenses.

A merger with US Airways and the subsequent cost cutting in pilotsí union alone would save nearly $130 million every year, a lead negotiator for AMR Corp’s pilot union last month said. However, this wisdom is not coming from the company management which is still adamant on moving through its restructuring under bankruptcy protection and not undertaking any consolidation. For some unfathomable reasons, AMR chief executive Thomas Horton believes increasing flying by 20 per cent over the next five years, mostly on international routes, is the right way out even though it has been amply demonstrated that the carrier would most likely be face with oversupply of seats leading to pricing pressure.†

Thankfully, the unions have better sense. The Association of Professional Flight Attendants, which had conclusion less talks with the carrier for two days, later said a merger is highly desirable as opposed to a solo flight out of rough weathers. "Our airline needs a network that can grow and compete with United and Delta. A strong company will provide more job security than even the best agreement American can offer as a standalone," said APFA President Laura Glading.†

It is not that the management is not aware of these benefits. Under tremendous pressure from left, right and centre, AMR last month said it would consider alternatives, but showing less interest in LCCís merger proposal may be just a way to inhibit its desperateness and get the best deal. Either way, it looks AMR has hit the bottom and even though negative news-flow from Europe has kept its stock price under check, its fundamentals are improving as Horton said, the company came out of April "with great momentum."††

While the merger possibilities are good for both companies, JetBlue Airways (NASDAQ: JBLU), an insider to the entire situation, is also looking good having advanced 12 per cent in the last week.