Airline Sector Review: Post UAL-Continental and Southwest-AirTran (UAL, AMR, LUV, AAI, JBLU, LCC, DAL, SKYW, XJT, FAA)

Today marks the game-changing merger of Continental and United and the two are one as United Continental Holdings Inc. (NYSE: UAL).  America’s new #1 airline will have a long integration ahead of itself.  Our readers determined after the merger was announced that this was good for investors and bad for consumers, an indication that things at the Department of Justice and/or the Federal Trade Commission are the same for rubber-stamping mergers as they have been in the last decade.  What we wanted to do was review how this merger will impact the airline sector where AMR Corp. (NYSE: AMR) fends for itself, how the Southwest Airlines Co. (NYSE: LUV) and AirTran Holdings Inc. (NYSE: AAI) will play in, and how this will impact JetBlue Airways Corporation (NASDAQ: JBLU), US Airways Group, Inc. (NYSE: LCC), Delta Air Lines Inc. (NYSE: DAL), and more.  There is also ExpressJet Holdings, Inc. (NYSE: XJT) merging with SkyWest, Inc. (NASDAQ: SKYW) and you can expect a consolidation of membership in carriers in the Claymore/NYSE Arca Airline (NYSE: FAA) ETF from all of these mergers.

United Continental Holdings Inc. (NYSE: UAL) will be based in Chicago rather than Houston and the combined trailing 12-month revenues from June would have been $31.4 billion.  The new United and its affiliates will operate 5,800 flights a day to 371 airports, with hubs in Chicago, Cleveland, L.A., Denver, Guam, Houston, Newark, New York, San Francisco, Tokyo and Washington, D.C.  The new company has approximately $9 billion of unrestricted cash and the merger is expected to deliver $1 billion to $1.2 billion of annual cost and revenue benefits by 2013.  We are still awaiting a finite airplane count expectation ahead.

Southwest Airlines Co. (NYSE: LUV) announced just this week that it was acquiring AirTran Holdings Inc. (NYSE: AAI) in a move to increase it regional footprint.  For Southwest to enter new markets like Atlanta, Reagan (D.C.) and Laguardia (NYC), as well as many other airports in the U.S., an acquisition was the only way to grow beyond organic expansion because capacity constraints are there as gates are just full.  This is a break away from the one-plane model because of adding some smaller jets, so it will be interesting to see how this pans out in that sense.  Southwest shares were at $12.28 on September 24, 2010 and now shares are trading above $13.00 versus a 52-week range of $8.10 to $14.16.

AirTran revenues and operating income, excluding special items, for the twelve months ending June 30, 2010, were $2.5 billion and $128 million, respectively. Southwest Airlines revenues and operating income, excluding special items, for the twelve months ending June 30, 2010, were $11.2 billion and $843 million, respectively.  Based on current operations, the combined organization would have nearly 43,000 Employees and serve over 100 million customers annually in over 100 different airports. The combined fleet consists of 685 active aircraft: 401 Boeing 737-700s, 173 Boeing 737-300s, 25 Boeing 737-500s, and 86 Boeing 717s, with an average age of approximately 10 years.

AMR Corp. (NYSE: AMR) has still gone at it alone and has been left out of mergers.  Whether this new merger closure makes the company want to look for an acquisition is an unknown, as there have been reports that it would buy where it could AND that it was going to stay focused on its own model.  American Airlines, along with American Eagle and the American Connection, serves 250 cities in 40 countries with about 3,400 daily flights. The combined network fleet numbers more than 900 aircraft.  At $6.23 today, AMR’s 52-week trading range is $5.11 to $10.50 and the shares were trading at $6.38 a week ago before the Southwest-AirTran deal.

JetBlue Airways Corporation (NASDAQ: JBLU) has already come out and said that the company prefers or intends to operate alone.  JetBlue has grown to serve more than 23 million customers annually, and at the end of 2009 it operated 151 aircraft, serve 60 cities and had revenues of $3.3 billion.  The company now serves 61 cities with 650 daily flights.  At $6.68, its 52-week trading range is $4.64 to $6.95 and shares were at $5.94 on September 24 before the Southwest-AirTran deal was announced.

US Airways Group, Inc. (NYSE: LCC) is a very mixed fleet with 11 different plane models in the mainline group and 9 different plane models in the express unit.  The company has 3,100 flights per day to and from over 200 communities in the U.S.and abroad, employs more than 31,000 aviation professionals worldwide and is a member of the Star Alliance network (as is Continental).  With its US Airways Express partners included, the airline serves approximately 80 million passengers.  At the end of 2009 it was the fifth largest U.S. carrier measured by domestic revenue passenger miles and at the end of 2009 it operated 349 mainline jets and regional airline units and  affiliates operated approximately 236 regional jets and 60 turboprops.  At $9.29, its 52-week trading range is $2.82 to $11.40 and the stock was trading at $8.99 a week ago before the Southwest-AirTran deal was announced.

Delta Air Lines Inc. (NYSE: DAL) merged with Northwest Airlines back in 2008, so in theory the company should be a status-neutral play for now.  Delta now controls close to three-quarters of the passenger traffic in the Hartsfield-Jackson Atlanta airport. Figures may now be different because of a hub change and because the company has been downsizing its fleet.  The company site notes that Delta serves more than 160 million customers to 351 destinations in 64 countries.  It also employs more than 75,000 employees and operates a mainline fleet of over 700 aircraft.  At $11.83, Delta’s 52-week range is $6.78 to $14.94 and shares were at $11.70 a week ago before the Southwest-AirTran deal.

ExpressJet Holdings, Inc. (NYSE: XJT) and SkyWest, Inc. (NASDAQ: SKYW) have already been given Federal Trade Commission clearance for their pending merger.  SkyWest currently serves a total of approximately 225 cities in the United States, Canada, Mexico and the Caribbean, with approximately 2,800 daily departures; ExpressJet Airlines serves 135 scheduled destinations in North America and the Caribbean with approximately 1,400 departures per day.  ExpressJet is being acquired for $6.75 per share in cash.

We should have a new public airline coming soon as well, with a focus in the discount carrier sector.  Spirit Airlines recently filed its IPO documents with the SEC.  The company’s filing was for up to $300 million in stock to be sold, although that can change and the figure is just for filing purposes.  Spirit plans to more than double its fleet of airplanes in the coming 5-year period.

The mergers here so far in the airline sector are going to create a consolidation of holdings inside the Claymore/NYSE Arca Airline (NYSE: FAA) as the ETF that tracks the airline sector as a whole.  The ETF trades at $37.94 versus a 52-week range of $21.98 to $38.13 and shares were trading at $35.80 a week ago before the Southwest-AirTran deal was announced.  Claymore recently changed names to Guggenheim Funds and the new name is Guggenheim Airline ETF under the same “FAA” ticker.  Average volume here is still rather low at about 31,000 shares per day and the assets under management are listed on the site as being only $46.892 million.

JON C. OGG