Based on headline news merger announcement appears imminent. And while Delta will most likely be a first mover, it's not obvious to us it will be a final mover, hence our Neutral rating.
Our concern -- a counteroffer from AMR for Northwest could cause Delta to overpay or even lose out to an AMR bid. While we presume Delta has factored this possibility into their outlook and prepared for this scenario, at the end of the day, it's a Northwest board decision, hence our concern.
Lastly, AMR has a history of aggressively participating in industry M&A and believe today should prove no different.
For those wondering why Delta couldn't force AMR to overpay, it could -- potentially. However, we start with the assumption that AMR benefits from a superior network which when potentially combined with Northwest's results in better revenue synergies versus a Delta/Northwest combination. Hence our view that AMR can afford to pay more than Delta in our view.
We don't expect Southwest to buy another airline, but think it's likely Southwest goes shopping for assets that are carved-out. What investors fail to appreciate is that Southwest is arguably the best-positioned to benefit from industry M&A.
On our outlook, Southwest is nicely positioned to reduce a frequency or two in its markets, and then redeploy those planes in new markets. Naturally, we expect the existing markets to become more profitable, and given the high fares in the new markets we anticipated Southwest will be entering, it's logical to assume that Southwest gets back to reporting double-digit operating margins. Hence our belief that shares represent a great value at current levels.