Top reasons a United Airlines and American merger is unlikely to happen

The United Airlines (UAL) and American Airlines (AAL) stocks will be in the spotlight today, April 14, as investors react to news of a potential mega-merger. AAL has dropped to $11.25, down by over 30% from its highest point last year.

Similarly, United Airlines has dropped to $95, down by 20% from the same period last year. The two have pulled back from their lowest levels this year as jet fuel prices have eased a bit.

UAL vs AAL stock prices | Source: TradingView

United Airlines wants to merge with American

The main catalyst for the AAL and UAL stocks is reports that United Airlines wants to merge with American, a deal that would create the biggest airline in the US. United has a market capitalization of over $30 billion, while American is valued at $7.2 billion.

The two made over $59 billion and $54 billion in revenue last year, with their net profits rising to $3.3 billion and $112 million, respectively. They are the biggest companies in terms of available capacity  

According to Reuters, Scott Kirby, United’s CEO, pitched the idea to President Donald Trump in February, arguing that it would make the combined company more competitive in the international market. Also, he noted that the combined company would help the US tackle its large trade surplus.

According to Reuters and Bloomberg, it is unclear whether United has made a takeover approach to American.

Odds of the merger are low 

Chances are that the deal between United and American will not go ahead. First, American regulators, even in a Republican administration, will not be comfortable to approve that consolidation because it will reduce competition in the industry.

A good example of this is when Spirit Airlines attempted to merge with JetBlue, another low-cost carrier. American regulators and a federal judge ruled against it, contributing to Spirit’s bankruptcy.

Second, the deal would come at a difficult time when American consumers are contending with high inflation. A report released last Friday showed that the headline Consumer Price Index (CPI) rose to 3.3% in March this year from the previous 2.4%

A merger between the two biggest airline companies would reduce competition and push fares up. Indeed, data shows that airfares and auxiliary costs have jumped in the past few months, a trend that may accelerate after the merger.

Third, politically, this is a difficult time to execute a merger as the US is moving towards the midterm elections. Republicans, who are expected to lose, will oppose it to attract voters. Democrats who are expected to take the Senate and the House of Representatives are expected to oppose it and launch investigations.

Additionally, United Airlines’ investors may be opposed to the deal because of American Airlines’ historical challenges that have made it one of the least profitable airlines in the US. 

Data shows that American has a net profit margin of 0.20%, while United has 5.5%. Delta’s margins stand at over 6%. As such, their fear is that American’s business will dilute United’s.

Also, despite being a smaller company, American has a much higher debt profile. Data shows that it has over $30 billion in net debt compared to United’s $18 billion.