US Airways (LCC) and United (UAUA) are in merger talks that could create a carrier as big as that formed by the Delta (DAL) buyout of Northwest Airlines. Even as scale and the related cost savings become more important, airlines such as Southwest (LUV) and JetBlue (JBLU) may elect to keep their more limited but profitable route systems. The two really large airlines that will be left out in the cold are American (AMR) and Continental (CAL).
AMR had $20 billion in revenue in 2009 and lost $1.5 billion. Its long-term debt is $10.5 billion. Continental had revenue of $12.5 billion and lost $282 million during the same period. Its long-term debt is $5.2 billion. A merged US Air and United would have combined revenue of $26 billion. An AMR deal with Continental would create an even larger company as measured by revenue.
But adding to revenues and saving money aren't the only factor in mergers. Unions may resist the link-up, and customer relations are always battered by the troubles that result from putting together disparate reservations systems and airport configurations.
However, a look at AMR's and Continental's route maps shows that the two carriers could offset one another's weaknesses. American has a particularly strong route system in the middle south of the U.S. It also has large hubs in Chicago and Raleigh-Durham, N.C. Continental's great strengths are in the eastern U.S., particularly out of Newark, N.J.
The two airlines could complement each other overseas, as well. Continental has many routes to Europe from its Newark hub. American has a large hub in Tokyo from which it serves China and India.
An AMR tie-up with Continental would save the new carrier a lot of money, and it would also create an airline set up to serve the three largest population regions of the world.
Learn the most important step in structuring an investment portfolio.View Course »