US airlines need to fly abroad for better returns

NEW YORK Fri Feb 15, 2013 10:37am GMT

The tail sections of American Airlines (L) and US Airways aircraft are on the ramp at Dallas-Ft Worth International Airport February 14, 2013. REUTERS/Mike Stone

The tail sections of American Airlines (L) and US Airways aircraft are on the ramp at Dallas-Ft Worth International Airport February 14, 2013.

Credit: Reuters/Mike Stone

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NEW YORK Feb 14 (Reuters Breakingviews) - U.S. airlines need to fly abroad for better returns. The $11 billion union of US Airways and AMR should boost the industry's profitability. But earnings won't be able to pick up more altitude until America's airlines team up with overseas rivals. Some such deals could nearly double margins. But it requires Congress to lift curbs on foreign ownership.

Right now Wall Street analysts reckon America's two largest airlines are winging their way to solid profits. The consensus is that Delta (DAL.N) will land $2.2 billion this year, a 5.8 percent net margin, while United Continental (UAL.N) is on course for $1.5 billion, or a 3.8 percent margin. That would be pretty robust, but investors are more skeptical - Delta's stock trades at just over five times and United's just under seven times those estimates. And that's after a 60 percent surge for Delta over the past six months and a 45 percent rally for United.

That's probably a tad unfair. After the AMR-US Airways merger, four airlines will control more than 80 percent of domestic routes. That caps eight years of consolidation for U.S. carriers. And since 2008 alone, available seat miles on U.S. airlines have fallen by about 15 percent, according to industry body Airlines for America. All in, that should mean fewer destructive price wars and more efficient carriers. But fears of a return to old practices - and of oil price hikes - clearly remain.

Merging with an overseas airline would bolster the income statement. Granted, there aren't too many profitable airlines to choose from right now. But assume United hooked up with Japan's All Nippon Airways ANA.L (9202.T) and managed to cut costs equal to 2 percent of combined revenue - the midpoint of recent domestic U.S. mergers. That would, based on forward earnings estimates and current low tax rates, mean a combined net margin of 5.6 percent. Run the same calculation for a Delta-ANA tie-up, and the joint net margin would hit 7 percent.

There's just one sticking point: outdated security fears limit foreign fliers to having no more than a 25 percent stake in American carriers. Lifting that would be a smart thing to do.

CONTEXT NEWS

- On February 14 American Airlines and US Airways announced a plan to merge to form the world's biggest airline by seat miles with a combined equity value of $11 billion.

- The merged airline will be majority-owned by creditors, unions and employees of American parent AMR, which filed for Chapter 11 bankruptcy in November 2011.

- The airline will carry the American Airlines name and on a pro forma basis is 2 percent larger than current top dog United Continental Holdings by traffic, as measured by the number of miles flown by paying passengers worldwide.

- The United States restricts foreign ownership of airlines to 25 percent.

- US Airways Press release: link.reuters.com/nyf95t

- Reuters graphic: link.reuters.com/daf95t

- Reuters: American Airlines, US Airways unveil $11 billion merger

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.) (Editing by Antony Currie and Martin Langfield)

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