Analyst: US Airways is attractive merger partner

US Airways had been dubbed the "ugly girl" by Continental Airlines' chief executive officer Jeff Smisek early this month while announcing his airline's proposed merger with suitor United Airlines. It was a comment that Smisek soon apologized for.

But veteran airline analyst Bob McAdoo said this week that US Airways Group Inc. was an attractive merger partner and that a combination with American Airlines would help American compete better across the Atlantic in Europe.

US Airways' Philadelphia hub is key to collecting passengers from 80 U.S. cities for flights to 17 European destinations, McAdoo, of Avondale Partners L.L.C., said in a client note.

US Airways shares rose 8.2 percent to close at $8.45 Wednesday after his report, released Tuesday, along with an upgrade of the stock by JPMorgan Chase & Co. analyst Jamie Baker, who said declining fuel prices, combined with a lack of hedges by US Airways, caused him to upgrade shares to "overweight."

"By the numbers, US Airways' Philadelphia hub is the most effective collector of traffic out of the north and eastern U.S. to Europe, surpassing the productivity of even Continental's Newark hub," McAdoo said.

Philadelphia generates more revenue to and from Europe each day than American does at either New York's JFK or Chicago's O'Hare airports, McAdoo wrote.

From Kennedy, American serves only 17 U.S. cities and nine European destinations.

From Philadelphia, US Airways averages 14.5 flights a day to Europe, carrying 5,055 passengers, and generating $1.7 million in revenue a day.

A US Airways merger would give American, which is strong in the Midwest and West, 63 new cities it does not now serve.

"American simply doesn't have a way to gather traffic broadly from the eastern one-third of the U.S., arguably the region that generates the most traffic to Europe," McAdoo wrote. "Philadelphia is a natural gathering point for such traffic."

American and British Airways P.L.C. dominate the New York-to-London market, but their transatlantic presence in their Oneworld airline alliance is not as large as perceived, McAdoo wrote.

Adding US Airways with its Philadelphia hub to American, or to the Oneworld alliance would strengthen Oneworld's standing among the other two global airline alliances, SkyTeam, which includes Delta, and Star Alliance, which includes US Airways.

American has said it is not interested in a merger. In the alternative, British Airways should team up in a business alliance with US Airways, McAdoo said. In 1993, British Airways paid $400 million for a 25 percent stake in US Airways. The arrangement ended in 1997.

"Some analysts and the press have termed US Airways as an unattractive merger partner, citing a somewhat smaller overall presence internationally," he said. "To the contrary, US Airways network and European presence could be a nice addition to someone's existing larger network."

How valuable? "We believe adding US Airways' Philadelphia hub alone would add more daily connecting revenue to the American system" than Japan Airlines Corp. does from all of Asia.