Survey Results Are In: American Airlines Not Expected To Experience An Integration Setback

In a report published Wednesday, Morgan Stanley analyst Rajeev Lalwani discussed results of a survey in which trading and investment pros were asked if American Airlines Group Inc AAL will experience a "major, stock impacting integration setback" this year.

According to the findings, 73 percent of respondents believe American Airlines will not experience such a setback. In fact, the survey results indicated an "incrementally bullish" tone versus prior surveys.

"Even with the cutover to a single reservation system still ahead, a process which we consider to be one of the most complex aspects of integrating two airlines, we are not surprised that investors are more optimistic than in the past," Lalwani wrote.

The analyst said that American Airlines secured several major wins, most notably a successful collective bargaining agreement with its pilot and flight attendant employee groups, a successful merging of frequent flyer programs as well as a single operating certificate from the FAA. In addition, the company implemented a multi-step process to ensure a "smooth" transition to a single reservation system and thus far there have been no announced setbacks.

Setbacks Should Be A ‘Base Case'

Lalwani pointed to history which suggests integration setbacks should be one's "base case." Most recently, the reservation system cutover for United and Continental in 2012 resulted in operational issues that "significantly" weighted on PRASM (passenger revenue per available seat mile). The analyst estimated that passenger unit revenues for United Continental Holdings Inc UAL underperformed its peers by several hundred basis points.

In fact, even Delta Air Lines, Inc. DAL experienced setbacks even though the company is viewed to have undergone "the most successful" integration through its acquisition of Northwest Airlines.

Put into perspective for American Airlines, the analyst estimated each 100 basis points of PRASM represents approximately $350 million. However, the analyst concluded that the company's management team has the necessary experience and the "benefit of learning from others" to mitigate integration.

Bottom line, Lalwani concluded that investor conviction in a successful merger is reflected in the bullish tone from his survey and the stock's premium multiple at approximately 4.8x EV/2016E EBITDAR, versus 4.3x and 3.8x at Delta Air Lines and United Continental.