AT&T (NYSE: T) has announced it will buy T-Mobile from Deutsche Telekom. Sprint-Nextel (NYSE: S), the struggling wireless company, will object to the combination. So will a number of regulators. It is not fair, they will say, that one company should have such a large part of the U.S. wireless market.

There is a real chance that Nasdaq (NASDAQ: NDAQ) will bid for rival NYSE: Euronext (NYSE: NYX). That would create one large exchange where stocks listed in the US would trade. A number of deal experts say the merger would completely undermine the market competition for public company listings.

The elements of a new M&A boom are in place. Stock prices are high which makes shares ready capital for deals. Corporate cash balances are at record levels. Shareholders at companies which have large cash balances have agitated managements to put their surplus capital to use. Large corporations which do not have loads of cash can borrow it on the capital markets at extremely low rates.

US regulators recently allowed Comcast (NASDAQ: CMCSA) to purchase a controlling interest in NBCU. Objections to the deal were voiced by content companies that did not want to see one of their competitors in the hands of the largest cable firm in America. Federal regulators saw the situation otherwise. Comcast’s future actions may prove them wrong.

Hungry investment bankers are flocking back to the market as companies seek new ways to deploy their cash. They have had three lean years. Investment banks which have had proprietary trading curbed by Dodd-Frank need a new way to support earnings. The underwriting of debt and equity issues has not been enough to offset that.

The next rounds of consolidation are likely to be in industries dominated by one or two companies that need to add to their existing businesses. This would include the chip industry where Intel (NASDAQ: INTC) has been challenged by firms like ARM which have a strong presence in the mobile processor sector. Should Intel, which has had antitrust problems in the past, be allowed to take a major share of a new market because it has the capital to do so?  Smaller rivals will make the case that it does not.

The airline industry is still overcrowded. Delta, United, Northwest, and Continental are not four companies, but two. American (NYSE: AMR) has struggled because it has lost its dominance in the US market and does not have the cost advantages of a merger. The same is true to a lesser extent for Southwest (NYSE: LUV) and JetBlue (NASDAQ: JBLU). Neither has an overseas network which can be fed by its domestic traffic. Every company in the industry has to find ways to cut costs as crude prices rise.

The AT&T deal to buy T-Mobile will receive extensive scrutiny. Regulators will have a new chance to prove they are worthy of their government salaries. The abundance of cash and bankers will soon allow them to prove that case again and again.

Douglas A. McIntyre

Coming next month AirlineFinancials.com estimates US Airways (LCC) will report an all time record 3^rd quarter profit of $225 million from $3.2 billion in projected operating revenue.

This record high profit and near record 3^rd quarter revenue, follows US Airways 2^nd quarter 2010 profit margin of 8.36%. When comparing the nine largest US airlines, Alaska’s (ALK) 8.6% was the only profit margin higher than US Airways for the recent 2^nd quarter.

Less than two years ago, US Airways reported a 3^rd quarter loss of $242 million (including special items, the loss was $865 million). Toward the end of 2008, United (UAUA) and US Airways were at the top of many analysts’ list of carriers that were most likely to join the growing graveyard of failed airlines.

Just over 10 months ago in a conference call, US Airways CEO Doug Parker stated:

I think those of us [airlines] who are around have made it through a very difficult time. – It is not over – is probably the best way to say it. …This is still… what has to happen; we have to get this industry back to profitability.

The standard can’t just be survival. We passed that standard but there is a higher standard out there which is getting actual returns for investors on their investment.

Not only have Mr. Parker and the US Airways employees turned their airline around but they are now leading the industry in several categories.

Operationally, US Airways on-time performance generally leads the legacy airlines. Additionally, US Airways receives fewer consumer complaints than most other legacy carriers.

In the last year, US Airways stock is up well over 200%. Excluding United, which had a higher stock return due to their merger with Continental (CAL), US Airways stock increase was over twice the return achieved by the other seven major airlines over the same time period (see following chart – time period is prior 52 weeks as of September 1^st, 2010).

AirlineFinancials.com believes there are two primary reasons why US Airways is outperforming most of the industry on the cost side.

• Approximately two years ago, US Airways management made the decision to not hedge fuel. Excluding US Airways, all of the major airlines currently have some type of fuel hedging program. - In short, fuel hedging is a type of insurance airlines purchase to offset the price volatility of jet fuel. This “insurance” is very expensive and drives a negative return when actual fuel prices remain more or less stable. – The bottom line for the past several months is after reconciling the cost of fuel hedges compared to industry competitors, US Airways has a fuel cost advantage of approximately 3-7% for their net fuel cost.

• Excluding much smaller low cost carriers JetBlue (JBLU) and Air Tran (AAI), US Airways has the lowest labor costs in the industry.

Recognizing that fuel and labor represent the two highest cost items for airlines, US Airways has a significant cost advantage over competitors.

For year 2009, US Airways labor costs were 26.7% of operating revenues compared to Continental at 27.9%, United at 28.4%, Delta (DAL) at 30.0%, Alaska at 31.4%, Southwest (LUV) at 33.5%, and American (AMR) tops the list at 34.8% (see following chart – all ratios are for mainline operations).

To put this in some perspective (see note), compared to the largest competitors US Airways has a labor cost advantage of $97 million over Continental, $140 million over United, $268 million over Delta, $551 million over Southwest (LUV), and $653 million over American. Note: There are numerous variables that would likely increase or decrease the actual dollar values noted in the labor cost advantage (see following chart – cost advantage assumes US Airways would have the same labor cost ratio of operating revenue as the airlines noted above - values are for mainline operations only).

On the revenue side for the recent 2^nd quarter 2010, US Airways had:

• 18% year-over-year increase in passenger yield. United was the only major airline with a higher yield increase (yield is passenger revenue/passenger miles).

• 18.4% year-over-year increase in unit revenue. United and Southwest were the only two major carriers with higher RASM increases (RASM is operating revenue/ASM capacity).

• 19.3% year-over-year increase in total operating revenue. United and Southwest were the only two major airlines with a higher revenue increase.

• 26.2% year-over-year increase in ATL (advance ticket sales). JetBlue was the only major airline with a higher increase in ATL.

• For the recent 2^nd quarter, US Airways had at or near the industries best operating income margin, net income margin, and EBITDAR margin.

Conclusion- Based on US Airways more recent strong performance both operationally and financially, there should be no doubt US Airways is ready to compete.

# # #

Disclosure- The above opinions and comments should not be used to determine the worth of any stock or investment. At the time of writing, the author and his family did not hold stock and/or derivative positions in any of the airlines covered in this article.

_____________________________________________________________

Robert Herbst is an independent airline industry consultant. He is the founder of AirlineFinancials.com which provides airline industry analysis and commentary for major US carriers. In addition to his consulting work, Mr. Herbst was a commercial pilot from 1969 until January 2010. His aviation experience and financial background provide a unique analytical perspective into the airline industry.

The report, titled “All Rates But 1-Year ARM Hit Record Lows In Freddie Mac Weekly Survey” included a comment from Frank Nothaft, Freddie Mac vice  president and chief economist. “Mortgage  rates for all but traditional 1-year ARMs hit all-time record lows this week in  our survey while activity in the housing market slowed in May following the  expiration of the homebuyer tax credit,Freddie  Mac began collecting rates for 30-year fixed loans in April 1971, 15-year fixed  mortgages in September 1991 and 5-year hybrid ARMs in January 2005. The record low for traditional 1-year ARMs  of 3.36 percent occurred during the week of March 25, 2004.”High employment and tight standards for granting mortgages have kept many buyers out of the market. Just as important, foreclosures and high inventories of unsold homes have continued to push prices down. Many home shoppers believe that they could buy a home and watch its value fall further.

Douglas A. McIntyre

Based on balance sheet data as of September 30, 2009 and market data as of January 31, the troubled companies selected from the data bas by 24/7 Wall St. are:

Zale (ZLC): bankruptcy probability–22.10%

ArvinMeritor (ARM):   bankruptcy probability–13.24%

Borders Group (BGP):   bankruptcy probability–11.91%

Nextwave Wireless (WAVE):   bankruptcy probability–11.49%

Douglas A. McIntyre

Mechel (MTL) Russian coal miner may issue up to 138.8 million preferred shares. Dives to $3.77 from 52-week high of $58.66.

Arvinmeritor (ARM) JPMorgan cuts rating for auto suppliers. Falls to $4.54 from 52-week high of $18.11.

Tyson Foods (TSN) Stephens research analyst lowers earnings forecast. Drops to $8.14 from 52-week high of $19.50.

Savient Pharmaceuticals (SVNT) Plummets on safety concerns about one if its treatments and analyst downgrade. Sells off to $2.80 from 52-week high of $28.42.

Douglas A. McIntyre

• ArvinMeritor (NYSE: ARM) Raised to Buy From Neutral at Goldman Sachs.
• BTU International (NASDAQ: BTUI) Started as Overweight at Thomas Weisel.
• Callaway Golf (NYSE: ELY) Started as Outperform at Raymond James.
• Coca-Cola Company (NYSE: KO) Raised to Buy from Hold at Deutsche Bank.
• Intel (NASDAQ: INTC) Started as Buy at ThinkPanmure.
• JA Solar (NASDAQ: JASO) Started as Buy at Broadpoint.
• Kellogg (NYSE: K) Raised to Overweight from Neutral at JPMorgan.
• Lehman (NYSE: LEH) Cut to Market Perform from Outperform as Wachovia.
• Omnicare (NYSE: OCR) Raised to Outperform from Perform at Oppenheimer.
• optionsXpress (NASDAQ: OXPS) Raised to Neutral from Sell at Merriman Curhan Ford.

Jon C. Ogg
June 10, 2008