Terry Maxon, who I respect immensely in the business of airline reporting, has a story in the Dallas Morning News saying that sources close to the potential merger between American Airlines and US Airways say an official offer is imminent.

All parties involved were supposed to meet last week in New York City but that meeting was delayed after Hurricane Sandy.

The radio silence since October 31st, the date the non-disclosure agreement between the two airlines was to expire, has made me curious.  The NDA was extended for more time between the two parties.

It’s hard to read the tea leaves on this one and at this point.  American Airlines and its executive team isn’t in the worst position possible although their position hasn’t improved measurably either.  My expectation was that the AA team would stall for more time.

To make this deal attractive, US Airways will have to make an offer that creditors find hard to refuse.  The expected valuation of the company upon bankruptcy exit is likely to be $6 Billion or more.

The combined revenues of each company would be approximately $36 Billion and that exceeds that of Delta and United Airlines.  The synergies that would result have the potential to offer profitability that might approach that of Delta and that isn’t trivial.

The creditors have to balance what their holdings would be worth with a stand-alone exit and what the prospects of AA are as a stand-alone company against what value might be created over the same time combined with US Airways.  Creditors aren’t going to sell their holdings as soon as the markets open upon bankruptcy exit.   My guess is that the time frame they’ll consider is somewhere between 3 and 5 years.

If I’m a creditor, I’m interested in the executive team that can create the most value over that time period.  Based on that, US Airways as a merger partner looks very attractive based on their performance with a sub-par network.  I would not be concerned about the ability of the US Airways team to integrate or operate the new airline as this team has proven that it can run an airline and that it knows American Airlines.  And it really does know American Airlines.

This is the part where pilots would have been very wise to have taken the deal they were offered this past summer.  With a 13.5% equity stake in the new airline, they would have been in a stronger position to profit.  I wonder if the creditors would be as excited about such a large stake in the airline given to the pilots with a US Airways merger involved.

We may hear something soon but we won’t hear it today, in my opinion.  I would look for an announcement next Monday or Tuesday at the earliest as I suspect all voices will need to be heard for the next few days.

Filed under: Airline News by ajax
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