Stalled American/US Airways Merger Could Impact Hubs

CHICAGO – Bankrupt American Airlines’ proposed merger with US Airways Group stands to impact all airports, but several large US Airways hubs are most at risk for change should the stalled marriage eventually get done, Wells Fargo Securities LLC says in a municipal commentary.

Smaller hub airports may come out ahead if the proposed union falls apart, but overall airport credit quality benefits from a strengthened airline industry, concludes the report from Wells Fargo municipal securities research. A quick resolution of the merger dispute is in the best interests of the sector as the uncertainty makes capital planning by airports all the more difficult.

The report offers both a brief assessment of the federal government’s move to block the merger by filing an anti-trust lawsuit in August, and the potential impact a completed merger would have on some airport credits.

“While a postponement or cessation of the proposed merger may appear to benefit smaller hub airports, which may be disproportionately affected by airline consolidation, we believe a strong airline industry is ultimately better for airport credit quality,” writes Wells Fargo senior analyst Randy Gerardes.

Analysts expressed surprise at the U.S. Department of Justice’s decision to file the lawsuit on behalf of a handful of states and the District of Columbia and questioned the strength of evidence to support the government’s contention that the union would hurt consumers by raising fares and fees.

Inflation-adjusted average passenger air fares have declined 13.5% since 2000 according to government data and the concerns raised in the lawsuit are not new or unique to this merger, the report said. “Since airline deregulation began more than three decades ago, airlines have spent time alternating between bankruptcy and consolidation. In our opinion, the government has shown to be consistently inconsistent,” it said.

Federal regulators in 2000 opposed United Airlines’ proposed takeover of US Airways and in 2006 opposed Delta Air Lines merger with US Airways, but since then it has approved the United/Continental union, the Delta/Northwest Airlines marriage, US Airways’ takeover of America West, and Southwest Airlines’ acquisition of Air Tran.

The report does not guess at whether the merger will eventually clear or how a potential settlement might specifically impact routes or other business decisions. “We think some level of route rationalization is inevitable should a merger ultimately come to fruition, with some airports being negatively affected,” the report reads.

Wells Fargo analysts believe the merger will have some effect on all airports but believe US Airways’ large hub airports of Phoenix Sky Harbor International and Philadelphia International Airport are at the most heightened risk of de-hubbing. 

US Airways also operates a large hub at Charlotte Douglas International Airport. American’s large hubs are located at Dallas-Fort Worth International Airport and Miami International Airport. American operates smaller hubs at Chicago’s O’Hare International Airport and New York City’s John F. Kennedy International Airport.

Analysts’ worries over the Philadelphia airport’s position stem from its close proximity to other strategic markets that host either US Airways or American hubs and concerns expressed by US Airways and other key airlines there on a proposed $6.4 billion capital plan. The airport already has an above-average cost per passenger and its capital plan is expected to be 67% bond financed. Some of the airport’s strengths that offset the risk of de-hubbing include US Airways service to European destinations and the high number of origination and destination passengers.

Analysts said they are most concerned over the Phoenix airport’s position, calling it the most likely candidate for dehubbing. It’s predominantly a domestic hub.  “On a positive note, the combined US Airways-American airline would only represent 46% of enplanements at PHX. Moreover, 59% of traffic is origination and destination and would likely be served by the remaining airlines or new carriers servicing the Phoenix market,” the report said. Phoenix has a manageable capital plan of $721.5 million, with only $154 million financed through debt.

In the event American scraps the merger and exits from Chapter 11 bankruptcy as a stand-alone company, Wells Fargo sees the potential for a negative credit factor at some airports as the airline could be weakened by “a more drawn out and perhaps contentious bankruptcy negotiation.”

Citing data from Interactive Data Corp., the report suggests there’s been no significant widening of spreads on airport credits most at risk since the DOJ lawsuit was filed.

The bankruptcy court recently confirmed American Airlines’ reorganization plan, but it assumes the resolution of the federal antitrust lawsuit.

The confirmation plan is strongly backed by holders of $3.3 billion of American Airlines-backed unsecured and secured municipal bonds as investors stand to fully recoup their investments. A trial date has been set for Nov. 25 in the U.S. District Court for the District of Columbia on the government’s anti-trust complaint.

The report’s author can be contacted to obtain a copy at Randall.Gerardes@wellsfargo.com.

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