Introduction
In February 2013, American Airlines and US Airways made an official announcement that declares they are going to merge and become the largest airlines in the world, by some measurement. As most big companies’ merger, the United States Department of Justice filed the antitrust lawsuit against the action. The settlement was reached that the merger was able to pursue the merger at the condition of giving off a number of landing slots at several major airports (Maxon, 2013).
The merger plan was initiated under the event that American Airlines filed for Chapter 11 bankruptcy protection. After months of searching for prospective merger partners, on April 20th 2012, American Airlines’ three unions announced they support the merger between American Airlines and US Airways and by December 9 2013, the merger deal is sealed.
American Airlines
American Airlines has a relative long history in the aviation industry. The company itself is founded by a merger of 80 carriers in 1930 and it is growing by further merger with other airlines companies. The company’s head office is located in Fort Worth, Texas, US. Its frequent-flyer program is called AAdvantage and its focus city is New York using LaGuardia Airport (LGA). The company operates both domestic and international routes linking North America, the Caribbean, South America, Europe and Asia. It has network which is based five hubs in Dallas, New York, Los Angeles, Miami and Chicago. In the international market, American Airlines belongs to alliance Oneworld and in the domestic market Envoy Air, Skywest, Inc., SkyWest Airlines, and ExpressJet Airlines schedule flights for it under the brand American Eagle.
On February 14, 2013, the company filed for bankruptcy. It is said to be a strategic move to cut labor cost when the fuel price was high and the travel demand was low.
US Airways
US Airways was called USAir back in 1979 when it formed its initial shape. It expanded into southeastern United States after the Airlines Deregulation Act. During 1980s, USAir experienced mergers with Pacific Southwest Airlines and Piedmont Airlines and became one of the largest airlines in the world.
The company head office is in Tempe, Arizona, USA.
The keywords for US Airways in 1990s were rebranding and modernization. It announced to rename itself to US Airways and adopted the Flag of the United States as its new logo. To support the rebranding, it made the largest bulk aircraft request in history till that time, which enabled the company to operate more efficiently.
The post-merger effects
Upon finishing the deal, stakeholder of AMR (the holding company of American Airlines) would own 72% of the new company while US Airways shareholders would keep 28% (Koenig, 2013). In terms of managing the company, the US Airways team will maintain most of the operational positions, including CEO Doug Parker. The consolidated airlines will locate its headquarter in Fort Worth, Texas which is old American Airlines head office. US Airways was expected to quit Star Alliance while American Airlines retain its position in Oneworld alliance. After the merger, both companies’ ticker symbol will be consolidated under AAL which stands for the merged company American Airlines Group Inc..
Firm values
Old American Airlines
We will use the forecasted free cash flow, as well as the related weight average cost of capital to estimate the old American Airlines value. Besides, the forecasting is based on data from AMR Corporation Annual Reports 2008-2012, and the table below is a summary of the most relevant data we will use in this part.
(Amount: million)
Growth rate forecasting
Coleman (2014) indicates that a firm’s growth rate should equal to its retention ratio times the ROE of this corporation. Nevertheless, AMR Corporation has been confronted with a condition that it suffered continues negative earnings, as well as shareholder equity deficit in the past 5 years. As a result, the ROE is not a suitable estimate
