Magnetar Financial's 4Q13 positions: An investor's guide

Part 3
Magnetar Financial's 4Q13 positions: An investor's guide (Part 3 of 7)

Magnetar Financial buys a position in American Airlines Group

Magnetar Financial LLC and American Airlines Group

Magnetar Financial LLC initiated new positions in Plains GP Holdings LP (PAGP), American Airlines Group Inc. (AAL), and Gaming And Leisure Properties (GLPI) and it added to its positions in Teekay Corp. (TK), Lamar Advertising (LAMR), and Denbury Resources (DNR).

Magnetar started a brand new position in American Airlines Group Inc. (AAL) that accounts for a 2.06% of the fund’s 4Q portfolio. AAL also saw interest from hedge funds Appaloosa Management and Paulson in the fourth quarter.

AA mergerEnlarge Graph

American Airlines parent AMR Corporation and U.S. Airways Group (LCC) officially announced their $17 billion merger on December 9 last year. Under the merger, U.S. 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 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 merger. Once the lawsuit was settled, the merger was approved by the bankruptcy court in late November last year. American Airlines emerged from bankruptcy and combined with U.S. 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.

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. It 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. The net profit also excluded 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 2013 with $10.3 billion in total cash and investments.

American Airlines Group’s total revenue passenger miles for February 2014 were 15.1 billion, up 0.5% versus February 2013. In the first two months of 2014, the company canceled approximately 28,000 flights, a 164% increase over the same period in 2013. American Airlines Group believes the weather-related cancellations had a slightly positive impact on unit revenue but had a larger negative impact on unit cost and first quarter profitability.

AALHEnlarge Graph

IATA trimmed its forecast for the airline industry profit in 2014 to $18.7 billion from the previous $19.7 billion. The main driver of the downward revision is higher oil prices that are expected to be largely offset by stronger demand, especially for cargo, which is being supported by a strengthening global economy. IATA CEO Tony Tyler said, “The efficiencies of improved industry structure through consolidation and joint ventures is providing more value to passengers and helping airlines to remain profitable even in difficult trading conditions. But we still need governments to understand the link between aviation-friendly policies and broader economic benefits. In many parts of the world the industry’s innate power to drive prosperity through connectivity is compromised by high taxes, insufficient infrastructure and onerous regulation.”

According to the airline, North American airlines are expected to post a profit of $8.6 billion—the biggest contribution to industry profits. The solid profitability of the North American industry is being driven by the efficiencies gained through consolidation and the contribution of ancillary revenues, which are most developed in the North American market.

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