American Airlines-US Airways merger may be optimal for IAG

Market chatter over potential consolidation in the airspace sector has picked up recently with the latest major report being that International Airlines Group (IAG) signed a non-disclosure agreement with American Airlines in order to study a potential purchase of a stake in the US company. Meanwhile, other rumours suggest that American Airlines is also holding talks with US Airways Group for a potential merger.

Analysts at Banco Sabadell have weighed in and pointed out that American Airlines filed for bankruptcy protection and must present a restructuring plan. As such, it remains in the air whether another US airline will acquire American Airlines and threaten the joint venture with IAG.

The move that would hurt IAG the most would be if American Airlines is acquired by a large rival such as Delta or United Continental Holdings. The larger airlines may remove American Airlines from the OneWorld global airline alliance and eliminate cost synergies that are involved for IAG. Nonetheless, this option is unlikely because of the regulatory issues that would surface from a deal between the largest US airlines.

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On the other hand, US Airways has shown the most interest in the troubled US airline and may already be working on a merger. It is not clear what implications an American Airlines-US Airways merger may have, says Banco Sabadell.

"We must keep in mind that only United and Lufthansa have anti-trust immunity in Star Alliance. As such, US Airways would not benefit from the synergies of the agreement and would be free to decide what alliance to join."

Banco Sabadell says that it would be likely for US Airways to move to OneWorld in a merger and thus create a bigger advantage for the joint venture with IAG. In fact, IAG Chief Executive Willie Walsh has voiced support for the merger.

"Out of all the possible combinations in the United States, this would wind up the best scenario for IAG," says Banco Sabadell.

IAG would also benefit if American Airlines remains solo. That may be the reason for IAG being interested in acquiring a stake and injecting capital into the cash-strapped airline.

"The purchase of a stake in American Airlines is not the optimal scenario because of the cash outlay involved...[but] the situation is better than losing the joint venture, one of IAG's main competitive advantages."

Another strategic moment for IAG will come in October when it decides on a restructuring plan for its Spanish airline, Iberia Airlines. The outcome of an arbitrage with Iberia pilots will also be revealed on October 11th.

Analysts at Banco Sabadell believe that the restructuring plan is necessary and that it would improve IAG's outlook over the medium-term. Nonetheless, it may still produce new conflicts with workers, they say.

Banco Sabadell maintained a 'buy' recommendation for IAG with a price target for the Spanish-listed shares of €2.35.

By 14:03 in London, shares were down 0.56% at 141.3p and 0.39% lower at €1.78 in Madrid.

MD