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DE Shaw: New purchases in 4Q 2013

Part 4
DE Shaw: New purchases in 4Q 2013 (Part 4 of 5)

Why DE Shaw opened a brand new position in American Airlines

American Airlines Group (AAL) is a 0.05% position in DE Shaw’s portfolio that was initiated in 4Q 2013.

AA mergerEnlarge GraphAmerican Airlines parent AMR Corp. and US Airways Group (LCC) officially announced their $17 billion merger on December 9, last year. Under the merger, US Airways Group became a subsidiary of AMR Corporation which changed its name to American Airlines Group Inc. (AAG). The merger was agreed to in February 2013 when American Airlines was going through bankruptcy court proceedings. The merged entity is expected to provide a stiff competition to other large global U.S. airlines such as United Airlines (UAL) and Delta Airlines (DAL). Currently, American Airlines, Delta Air Lines, Southwest Airlines (LUV), and United Airlines (UAL) account for more than 80% of the U.S. domestic airlines’ market. The merger also marked an end to the wave of consolidation in the airlines sector. The sector has seen large-scale mergers aimed at streamlining operations and creating profitability despite concerns of lower competition leading to higher fares.

The new American Airlines Group has a global network with nearly 6,700 daily flights to more than 330 destinations in 54 countries. The merger saw many obstacles including an antitrust lawsuit by the Justice Department, which tried to halt the combination. Once the lawsuit was settled, the merger was approved by the bankruptcy court in late November last year. The company emerged from bankruptcy and combined with US Airways under a new stock ticker AAL. According to the press release on the merger, the transaction is expected to generate more than $1 billion in annual net synergies by 2015.

AALHEnlarge Graph

The share price of American Airlines is almost up 40% since the merger was announced. The merged company posted its 4Q 2013 results last month and reported a combined net profit of $436 million on a non-GAAP basis excluding net special charges as compared to a combined fourth quarter 2012 non-GAAP net loss of $42 million also excluding net special credits. Based on a diluted share count of 742 million, fourth quarter 2013 diluted earnings per share were $0.59 on a non-GAAP basis. The company ended the year with $10.3 billion in total cash and investments. Analysts are, at present, bullish about the stock and the sector in general.

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