Acquiror: US Airways - LCC (assuming no merger)

Operating revenues:
Mainline passenger
Express passenger
Cargo
Other
Total operating revenues
Operating expenses:
Aircraft fuel and related taxes
Salaries and related costs
Express expenses
Aircraft rent
Aircraft maintenance
Other rent and landing fees
Selling expenses
Special items, net
Depreciation and amortization
Other
Total operating expenses
Operating income
Nonoperating income
(expense):
Interest income
Interest expense, net
Other, net
Total nonoperating expense,
net
Income before income
taxes
Income tax provision
Net income
add: depreciation
FCF
Earnings per common
share:
Basic earnings per share
Diluted earnings per share
Shares used for
computation (in
thousands):
Basic

Diluted

2012

Actual Results ($ million)

2011
2010
2009

2008

8,979
3,326
155
1,371
13,831

8,501
3,061
170
1,323
13,055

7,645
2,821
149
1,293
11,908

6,752
2,503
100
1,254
10,609

8,183
2,879
144
1,038
12,244

3,489
2,488
3,162
643
672
556
466
34
245
1,220
12,975
856

3,400
2,272
3,127
646
679
555
454
24
237
1,235
12,629
426

2,403
2,244
2,729
670
661
549
421
5
248
1,197
11,127
781

1,870
2,165
2,628
695
700
560
382
55
251
1,181
10,487
122

3,974
2,231
3,139
724
783
562
439
76
224
1,865
14,017
(1,773)

2
(343)
122

4
(327)
(13)

13
(329)
37

24
(241)
(83)

83
(218)
(240)

(219)

(336)

(279)

(300)

(375)

(178)
(38)
(140)

(2,148)
0
(2,148)

637
0
637

90
19
71

502
0
502

3.92
3.28

0.44
0.44

3.11
2.61

162,331

162,028

161,412

203,978

163,743

201,131

2012-11
5.6
8.7
(8.8)
3.6

Trends in Revenues (% changes)

2011-10
2010-09
2009-08
11.2
8.5
14.1
2.3

13.2
12.7
49.0
3.1

(17.5)
(13.1)
(30.6)
20.8

Trends in
average

2012

3.1
4.2
5.9
7.5

25.2
18.0
22.9
4.6
4.9
4.0
3.4
0.2
1.8
8.8

(1.6)

0.0

Trends in Expenses (% of revenues)

2011
2010
2009
2008

Forecast
average

2013
9,261
3,466
164
1,473
14,364

26.0
17.4
24.0
4.9
5.2
4.3
3.5
0.2
1.8
9.5

20.2
18.8
22.9
5.6
5.6
4.6
3.5
0.0
2.1
10.1

(2.6)

(2.3)

0.1

0.0

17.6
20.4
24.8
6.6
6.6
5.3
3.6
0.5
2.4
11.1

32.5
18.2
25.6
5.9
6.4
4.6
3.6
0.6
1.8
15.2

24.3
18.6
24.0
5.5
5.7
4.6
3.5
0.3
2.0
10.9

(2.2)

0.0

3,491
2,668
3,451
795
822
654
505
46
283
1,571
14,287
77

(311)
(234)
7
(241)
283
42

2014

Forecast Income Statements ($ millions)

2015
2016
2017
2018

2019

2020

9,552
3,611
174
1,583
14,920

9,852
3,763
184
1,702
15,501

10,161
3,921
195
1,829
16,106

10,480
4,086
207
1,965
16,738

10,809
4,258
219
2,112
17,398

11,148
4,437
232
2,270
18,087

11,498
4,623
246
2,439
18,806

3,627
2,771
3,585
826
854
679
524
48
294
1,632
14,840
80

3,768
2,879
3,724
858
887
705
545
50
306
1,696
15,417
83

3,915
2,991
3,870
892
921
733
566
52
318
1,762
16,020
86

4,068
3,109
4,022
927
958
762
588
54
330
1,831
16,648
90

4,229
3,231
4,180
963
995
792
611
56
343
1,903
17,304
93

4,396
3,359
4,346
1,002
1,035
823
636
58
357
1,979
17,990
97

4,571
3,493
4,519
1,041
1,076
856
661
61
371
2,057
18,705
101

(323)

(336)

(349)

(363)

(377)

(392)

(407)

(243)
2
(245)
294
49

(253)
2
(255)
306
51

(263)
2
(265)
318
53

(273)
2
(275)
330
55

(284)
2
(286)
343
57

(295)
2
(297)
357
60

(307)
2
(309)
371
62

Target: American Airlines - AMR (assuming no merger)

Operating revenues:
Mainline passenger
Passenger - regional affiliates
Cargo
Other
Operating expenses:
Aircraft fuel and related taxes
Salaries and related costs
Regional payments to AMR Eagle*
Aircraft rent
Aircraft maintenance
Other rent and landing fees
Commissions, booking fees and credit
card expense
Special items, net
Depreciation and amortization
Food service
Other
Operating income
Nonoperating income (expense):
Interest income
Interest expense, net
Other, net

Income (Loss) Before

Reorganization Items,
Net
Reorganization Items,
Net**
Income (Loss) Before
Income Taxes
Income tax (benefit)
Net Income (Loss)
add: depreciation
FCF

*These are payments under a Purchase Agreement, between AMR and its wholly-owned subsidiary, AM
**These are assumed to be non-recurring from 2015 onwards.

2012

Total operating revenues

Total operating expenses

Total nonoperating expense,

net

Actual Results ($ million)

2011
2010
2009

18,743
2,914
669
2499
24,825

17,947
2,724
703
2583
23,957

16,760
2,327
672
2391
22,150

15,037
2,012
578
2290
19,917

8,717
6,242
1,142
550
1,133
1,286

7,434
6,385
2,418
673
1,020
1,305

5,731
6,227
2,227
592
1,056
1,284

6,807
5,553
1,353
1,104
1,280
853

1,050
386
999
535
2,744
24,784
41

1,062
725
950
518
2,637
25,127
(1,170)

976
0
935
490
2,481
21,999
151

505
487
171
0
2,808
20,921
(1,004)

25
(662)
280

25
(689)
(14)

25
(654)
(26)

34
(744)
(38)

(357)

(678)

(655)

(748)

(316)

(1,848)

(504)

(1,752)

(2,179)

(116)

(2,495)
(569)
(1,926)

(1,964)
0
(1,964)

0
(504)
(35)
(469)

ween AMR and its wholly-owned subsidiary, AMR Eagle, which are not recurring costs.

0
(1,752)
(284)
(1,468)

illion)
2008

2012-11

18,234
2,486
874
2172
23,766
6,655
9,014
1,298
1,207
1,237
997
492
518
1,213
0
3,024
25,655
(1,889)
181
(803)
393
(229)

(2,118)
0
(2,118)
0
(2,118)

4.4
7.0
(4.8)
(3.3)

Trends in Revenues (% changes)

2011-10
2010-09
2009-08
average
7.1
17.1
4.6
8.0

11.5
15.7
16.3
4.4

(17.5)
(19.1)
(33.9)
5.4

1.4
5.2
(4.5)
3.7

2012

Trends in Expenses (% of revenues)

2011
2010
2009
2008

average

35.1
25.1
4.6
2.2
4.6
5.2

31.0
26.7
10.1
2.8
4.3
5.4

25.9
28.1
10.1
2.7
4.8
5.8

34.2
27.9
6.8
5.5
6.4
4.3

28.0
37.9
5.5
5.1
5.2
4.2

30.8
29.1
7.4
3.7
5.0
5.0

4.2
1.6
4.0
2.2
11.1

4.4
3.0
4.0
2.2
11.0

4.4
0.0
4.2
2.2
11.2

2.5
2.4
0.9
0.0
14.1

2.1
2.2
5.1
0.0
12.7

3.5
1.8
3.6
1.3
12.0

(1.4)

(2.8)

(3.0)

(2.4)

(8.8)

(0.5)

0.0

(3.1)

(2.3)

0.0

(0.2)

(0.8)

Forecast Income Statements ($ millions)

2014
2015
2016
2017
2018

2013
18,998
3,064
639
2,590
25,292

19,257
3,222
611
2,685
25,775

19,519
3,388
583
2,783
26,274

19,784
3,563
557
2,885
26,790

20,053
3,747
533
2,990
27,323

20,326
3,940
509
3,100
27,875

7,800
7,371
1,872
927
1,276
1,260

7,949
7,512
2,171
944
1,300
1,284

8,103
7,657
2,171
963
1,325
1,309

8,262
7,807
2,171
982
1,351
1,334

8,426
7,963
2,171
1,001
1,378
1,361

8,596
8,124
2,171
1,021
1,406
1,388

894
466
919
330
3,039
26,153
(861)

911
475
937
337
3,097
26,915
(1,141)

929
484
955
343
3,157
27,395
(1,121)

947
966
493
503
974
993
350
357
3,219
3,283
27,890 28,402
(1,100) (1,079)

985
513
1,013
364
3,350
28,932
(1,057)

(609)

(621)

(633)

(1,470)

(1,762)

(1,754)

(781)

(796)

(2,251)
(207)
(2,045)
919
(1,125)

(2,557)
(210)
(2,347)
937
(1,410)

0
(1,754)
(215)
(1,539)
955
(584)

(645)

(658)

(671)

(1,746) (1,737)

(1,728)

(1,746) (1,737)
(219)
(223)
(1,527) (1,514)
974
993
(553)
(521)

0
(1,728)
(228)
(1,501)
1,013
(488)

ions)
2019

2020

20,603
4,143
486
3,213
28,445

20,883
4,357
465
3,330
29,035

8,772
8,290
2,171
1,042
1,435
1,417

8,954
8,462
2,171
1,064
1,465
1,446

1,006
524
1,034
371
3,418
29,479
(1,034)

1,026
535
1,055
379
3,489
30,046
(1,011)

(685)

(699)

(1,719)

(1,710)

0
(1,719)
(232)
(1,487)
1,034
(453)

0
(1,710)
(237)
(1,473)
1,055
(417)

Merged Company

2013

Actual
Results
Operating revenues:
Mainline passenger

20,218

Passenger - regional
affiliates
Cargo
Other

3,131
685
2,709
Total operating
revenues

26,743

Operating expenses:
Aircraft fuel and
related taxes

7,839

Salaries and related

costs

5,460

Regional payments to
AMR Eagle*
Aircraft rent

3,326
768

Aircraft maintenance

1,260

Other rent and landing

fees

1,152

Commissions, booking
fees and credit card
expense
Special items, net

1,158
559

Depreciation and
amortization
Others

853
2,969
Total operating
expenses

Operating income
Nonoperating income
(expense):

25,344
1,399

Interest income

20

Interest expense, net

Other, net

(856)
(88)
Total
nonoperating
expense, net

(924)

Income (Loss) Before

Reorganization Items,
Net

475

Reorganization Items,
Net***

2,655

Income (Loss) Before

Income Taxes

(2,180)
Income tax (benefit)

Net Income (Loss)

add: depreciation
FCF

(346)
-1,834
853
(981)

Notes:
Increase in revenue is taken as an average of the trend of sales growth for pre-merger companies.
Expenses as a percentage of sales is taken as an average of the trend of the particular expense to rev
Effective corporate tax rate is taken at 35% for the merged company.
Synergies (in the form of additional revenue and cost savings) are taken as $900million and &1,000m
A:
AAG expects
additional
revenue
of $900million.
(Source:
http://www.cbsnews.com/news/american-a
smaller
gauge legacy
aircraft,
and longer
stage length.
Full year
domestic capacity is expected to be u
expected
be upRevenue:
approximately
7%cargo
vs. 2013."
2.
"Cargo to
/ Other
Includes
revenue, frequent flyer revenue, ticket change fees, excess
contract services, simulator rental, airport clubs and inflight service revenues."
(Source: Investor Relations Update, April 2014, American Airlines
B: "While the public sees US Airways as an integrated unit, it actually must operate as two separate c
C: The agreement would be around $190 million less than the $990 million American tentatively plans
D: "In 2013, special charges consisted primarily of a $192 million charge related to US Airways' pilot M
E: "They anticipate total cost savings of roughly $1,000 million." (Source: http://www.cbsnews.com/ne
F: Source: http://www.cbsnews.com/news/american-airlines-us-airways-announce-11b-merger/

AB
Forecast Income Statements ($ millions)

2014

2,015

Including
Merger and
Restructuring
Costs

Start of
Realization of
Synergies

2,016

2,017

2,018

2,019

28,808

29,456

30,119

30,797

31,490

32,198

6,834
785
36,426

7,153
790
38,452

7,488
796
40,591

7,839
802
42,848

8,205
808
45,231

8,589
814
47,746

72,853

76,752

79,894

83,185

86,634

90,248

11,575

21,163

22,029

22,937

23,888

11,732

10,283

18,312

19,061

19,847

20,669

21,531

5,756
1,771

12,061
3,531

12,555
3,676

13,072
3,827

13,614
3,986

14,182
4,152

2,154

4,131

4,300

4,477

4,663

4,858

1,963

3,657

3,807

3,964

4,128

4,301

1,435
523

2,705
830

2,816
864

2,932
16,637

3,053
937

3,181
976

1,231
5,066

2,152
8,810

2,240
9,170

2,332
9,548

2,429
9,944

2,530
10,359

77,202
(450)

80,369
(474)

87,161
(527)

77,651
12,596

41,756
31,097

99,423
(16,238)

(944)

30,153
1,200

28,953
10,134
1,231
1,231
2,462

(450)
0

(474)
0

(16,238)

(527)

12,596

(450)

(474)

(16,238)

(527)

12,596

(157)
2,152
2,152
4,304

(166)
2,240
2,240
4,480

(5,683)
2,332
2,332
4,665

(185)
2,429
2,429
4,858

4,409
2,530
2,530
5,061

owth for pre-merger companies.

end of the particular expense to revenue ratio for pre-merger companies.

taken as $900million and &1,000million, respectively. Details of these figures are:

www.cbsnews.com/news/american-airlines-us-airways-announce-11b-merger/)
This is
mestic capacity is expected to be up approximately 1% and international capacity
is due to two main reasons:

evenue, ticket change fees, excess/overweight baggage fees, first and second bag fees,
e revenues."

ally must operate as two separate carriers in which legacy US Air pilots and flight attendants can only fly on lega
0 million American tentatively plans to cut in labor costs. (Source: finance.fortune.com)
harge related to US Airways' pilot MOU that became effective upon the close of the Merger, $96 million related t
ource: http://www.cbsnews.com/news/american-airlines-us-airways-announce-11b-merger/) If the total cost savi
ays-announce-11b-merger/

A+B
Forecast Income Statem

2,020

Percentage
increase in
sales

Expenses as a
percentage of
revenue

2013

2014

2015

Horizon
32,923

2.25

28,259

28,808

29,370

8,991
820
50,401

4.68
0.74
5.56

6,530
803
35,592

6,834
785
36,426

7,152
768
37,289

71,185

72,853

74,579

94,035

25,928

27.57

11,291

11,575

11,870

22,435

23.86

10,039

10,283

10,536

14,777
4,326

15.71
4.60

5,323
1,722

5,756
1,771

5,895
1,821

5,061

5.38

2,097

2,154

2,212

4,481

4.77

1,913

1,963

2,014

3,314
1,017

3.52
1.08

1,399
512

1,435
523

1,473
534

2,637
10,793

2.80
11.48

1,203
4,941

1,231
5,066

1,261
5,196

40,440
30,744

41,756
31,097

42,812
31,767

94,620
(585)

(585)
0

(585)
(205)
2,637
2,637
5,273

(920)

29,824
(781)

(944)

30,153
(796)

(969)

30,798
0

30,605

30,949

30,798

(200)
1,203
1,203
2,405

(209)
1,231
1,231
2,462

(213)
1,261
1,261
2,522

s is due to two main reasons:

attendants can only fly on legacy US Air planes and legacy America West pilots and flight attendants can only fl

e Merger, $96 million related to professional fees and fees for US Airways to exit the Star Alliance, a $107 millio
-merger/) If the total cost savings are $150million, the cost savings individually identified are subtracted from t

A+B
recast Income Statements ($ millions)

2016

2017

2018

2019

2020

29,945

30,533

31,135

31,751

32,381

7,484
753
38,182

7,833
739
39,105

8,198
728
40,061

8,580
718
41,049

8,980
710
42,072

76,364

78,211

80,122

82,098

84,143

12,177

12,495

12,825

13,169

13,525

10,799

11,072

11,355

11,649

11,955

6,041
1,873

6,192
1,928

6,351
1,985

6,516
2,044

6,689
2,105

2,273

2,336

2,401

2,469

2,540

2,067

2,122

2,180

2,240

2,302

1,513
545

1,554
557

1,597
569

1,641
582

1,687
595

1,291
5,331

1,323
5,471

1,356
5,617

1,391
5,768

1,426
5,926

43,910
32,454

45,050
33,161

46,236
33,885

47,469
34,629

48,751
35,392

2013

2014

(994)

(1,021)

(1,048)

(1,077)

(1,107)

31,460

32,140

32,837

33,552

34,285

31,460

32,140

32,837

33,552

34,285

(217)
1,291
1,291
2,583

(221)
1,323
1,323
2,647

(226)
1,356
1,356
2,713

(230)
1,391
1,391
2,781

(235)
1,426
1,426
2,853

0
0
PV(net synergies):

ht attendants can only fly on legacy America West planes. This prevents US Airways from achieving maximum fle

ar Alliance, a $107 million charge related to the American's pilot long-term disability obligation, $58 million in se
ed are subtracted from this amount to find out 'other' cost savings.

Difference

2015

2016

2017

2018

2019

2020

ergies):

891

949

1,009

1,073

1,140

1,210
143,972

m achieving maximum fleet utilization that management says costs the airline $10 million a year." (Source: fina

ligation, $58 million in severance, $56 million related to employee awards granted in connection with the Merge

on a year." (Source: finance.fortune.com)

onnection with the Merger, a $43 million charge for workers' compensation claims, and a $33 million impairmen

a $33 million impairment charge associated with certain Boeing 757 aircraft held for sale. These charges were o

le. These charges were offset in part by a $31 million special credit related to a change in accounting method re

e in accounting method resulting from the modification of American's AAdvantage miles agreement with Citiban

agreement with Citibank, a $67 million gain on the sale of slots at LaGuardia Airport as a result of the settleme

s a result of the settlement reached with the DOJ and the cancellation of equity awards in connection with the M

in connection with the Merger." (10-K 2013, AAG) The only costs excluding merger costs are severance costs an

ts are severance costs and impairment charges (58+33).

Valuation of target assuming no merger

net income ($millions)

year
WACC
sustainable growth

2013
(1,125)
1
0.11

2014
2015
2016
2017
2018
2019
(1,410)
(584)
(553)
(521)
(488)
(453)
2
3
4
5
6
7
0.11
0.11
0.11
0.11
0.11
0.11
($3,912)

Valuation of acquiror assuming no merger (stand-alone valuation)

2013
2014
2015
2016
2017
2018
2019
net income ($millions)
42
49
51
53
55
57
60
year
1
2
3
4
5
6
7
WACC
0.05
0.05
0.05
0.05
0.05
0.05
0.05
sustainable growth
$339

Valuation after merger

net income ($millions)
year
WACC
sustainable growth

2013
(981)
1
0.07

2014
2015
2016
2017
2018
2019
2,462
4,304
4,480
4,665
4,858
5,061
2
3
4
5
6
7
0.07
0.07
0.07
0.07
0.07
0.07
$20,451

2020
(417)
8
0.11

or:
or:

2020
62
8
0.05

or:
or:

2020
5,273
8
0.07

or:
or:

horizon
(417)
8
0.11
0.066
(4,068)
($7,980) million
($7.98) billion

horizon
62
8
0.05
0.040
3,042
$3,381 million
$3.38 billion

horizon
5,273
8
0.07
0.066
344,660
$365,111 million
$365.11 billion

Determination of offer price range:

min = max[PV(target),MV(target)]
PV =
(7,980)
MV* =
90
Hence, min =
90
max = min + PV(NS)
PV(NS)*** =
Hence, max =

$143,971.66
144,062

alpha** =
PV(OP) =
price range:

0.11
16,087
90 <

16,087 <

Notes:
All calculations in $millions
*Source: http://online.wsj.com/news/articles/SB10001424052702303456104579489282879045884

**Assumption: In the merged company, former LCC shareholders received a 28% share in ownership,
share of these two parties (given that no other party has a majority share), is hence 31.5%. From this
(AMR) is 3.5%. Hence, value for alpha is calculated as 3.5/31.5.
***SOV is additional revenue of $900m and DOV is $1,200m merger costs. Detail of these figures is gi

Comparable Transactions:
Firms
Delta & Northwest
United & Continental
Southwest & AirTran

Deal Value
Year
($millions) Premium
Comments
2008
2,600
16.80%
2010
3,000
0 "merger of equals"
2010
1,400
69%
-

144,062

9489282879045884

% share in ownership, while former AMR shareholders received a 3.5% share. The combined
ence 31.5%. From this total, the amount which acquiror (LCC) is willing to share with target

ail of these figures is given when forecasts for merged company are tabulated.

g:
Data:
year
US Airways
EPS
American Airlines
EPS
Regression Results:
US Airways
EPS on time
ln(EPS) on time
American Airlines
EPS on time
ln(EPS) on time
Calculation of 'g':
US Airways
American Airlines
Merged

2008

2009

2010

2011

2012

(22.11)

(1.54)

2.61

0.44

3.28

(8.16)

(4.99)

(1.41)

(1.97)

(1.93)

(3.88)
(0.51)
(1.55)
(0.38)

0.040
0.066
0.066

Method:
first EPS and ln(EPS) are run on time, that is, models are run, for each firm individually
higher among the two coefficients is taken into consideration, as negative EPS can undervalue the val
then coefficient of interest is divided by average EPS over the past 5 years

Note: For merged company, 'g' for AMR is used as that is the bigger pre-merger company, according t
Source of methodology: http://people.stern.nyu.edu/adamodar/pdfiles/eqnotes/dcfgrowt.pdf

WACC:
Beta:

Rm*
Re**
coefficient****
Return on Equity (using
CAPM):
Rm - Rf***
Rf***
Re

US Airways
2008
(40.54)
N/A
(0.08)

5.50
4.00
0.04

2009
43.72
(37.39)

2010
15.62
106.82

2011
(2.67)
(49.35)

2012
13.63
166.27

Capital Structure
equity
debt
equity / (equity+debt)
debt / (equity+debt)

790.00
8,606.00
0.08
0.92

Return on Debt*****

0.08

WACC calculation

0.05

Sources:
*NASDAQ Composite Index, yearly returns
**Yahoo Finance
***http://www.duffandphelps.com/SiteCollectionDocuments/(Table)%20DP%20Recommended%20ERP%
****through regression by using STATA
*****taken as the average of cost of debt for various debt instruments held by the merged company

average
(3.46)
(3.69)

ndividually
EPS can undervalue the value of 'g' in this method

rger company, according to the level of operations.

tes/dcfgrowt.pdf

American Airlines
2008
(40.54)
N/A
0.63

5.50
4.00
0.07

2009
43.72
(27.55)

2010
15.62
0.78

2011
(2.67)
(95.51)

2012
13.63
128.57

(9,962.00)
33,226.00
0.43
1.43
0.08
0.11

%20Recommended%20ERP%20and%20Risk-Free%20Rates%20Over%20Time.pdf
by the merged company

Merged

3.85 **

5.50
4.00
0.25

(2,731.00)
45,009.00
0.06
1.06
0.08
0.07

Shareholder Value Analysis:^

Fixed-Share Deal:
Last day of trading before merger:
closing price of LCC on last day of trading:*
no. of diluted shares outstanding for LCC:***
so shareholders of LCC receive value of
or:
this contributes to 28% of AAL**
so the merger deal price becomes
or:
less: claims by***
1. AMR's labor groups
2. Unsecured creditors
3. Employees
value for AMR's shareholders
and value for AMR which LCC is paying
or:
valuation of AMG
PV(net synergies)
so valuation of target
premium paid
premium paid (%)
SVAR:
SVAR (assuming all cash deal) = premium paid / MV of acquiror =
SVAR for this fixed-share deal =
Hence, SVAR for LCC =
SVAR for AMR =
First day of trading for AAL:****
no. of shares issued
closing price
value of merged company
value to previous LCC shareholders
or:
value to previous AMR shareholders
or:

^all figures in $ except no. of shares

Sources:
*Bloomberg
**Various news reports related to merger

***Dallas news
****Dealbook, Wall Street, Yahoo Finance
Notes:
For PV(net synergies), SOV is additional revenue of $900m and DOV is
$1,200m merger costs. Detail of these figures is given when forecasts for
merged company are tabulated.
According to various news reports, the ownership share in equity of merged
company for former AMR shareholders is 3.5%.

22.55
207,900,000
4,688,145,000
4,688.15 million
16,743,375,000
16,743.38 million
2,000,000,000
6,000,000,000
155,000,000

2,543.61
712.21
712.21
89.03

8,155,000,000
3,900,230,000
586,018,125
586.02 million
(7,980.33) million
143,971.66 million
135,991.34 million
119,247.96 million
14.04

%
%
%
%

756,000,000
26.23
19,829,880,000
5,552,366,400
5,552.37 million
694,045,800
694.05 million

Number of
Industry Name
Firms
Beta
Cost of Equity E/(D+E)
Air Transport
25
0.94
7.73% 47.74%
Source: NYU Stern School of Business
Data used from: S&P Capital IQ, Bloomberg and the Fed
Data used as of: January 2014

Source
ICAO
World Bank
IATA
average

Estimated
Industry
Sustainable
Saturation
Growth Rate
Year
(%)
2020
4.5
2020
3.7
2022
N/A
2020
4.1

Std Dev in
Stock
Cost of Debt Tax Rate
92.87%
6.04%
13.79%

After-tax
Cost of
Cost of
Debt
D/(D+E) Capital
5.21%
52.26%
6.41%

Estimation of Synergies from Merger/Acquisition

Forecast
Income
Statement for
LCC for 2013 +
Forecast
Income
Statement for
AMR for 2013*

Operating revenues:
Mainline
passenger

28,259

Passenger regional
affiliates
Cargo
Other

6,530
803
4,064
Total operating
revenues

39,656

Operating expenses:
Aircraft fuel and
related taxes

11,291

Salaries and
related costs

10,039

Regional
payments
Aircraft rent

5,323
1,722

Aircraft
maintenance

2,097

Other rent and

landing fees

1,913

Commissions,
booking fees
and credit card
expense/
selling
expenses

1,399

Special items,
net

512

Depreciation
and
amortization
Food service**
Other

1,203
0
4,611
Total operating
expenses

Operating income
Less: merger costs

40,110
(454)

Post-merger
operating income
Nonoperating
income (expense):
Interest income

27

Interest
expense, net
Other, net

(1,005)
402
Total
nonoperating
expense, net

(576)

Income (Loss)
Before
Reorganization
Items, Net

(1,030)

Reorganization
Items, Net***

(2,179)

Income before
income taxes

(3,209)
Income tax
provision***

Net income
*terminology/classification as used previously in statements of AMR used
**clubbed with 'others' from 2013 onwards

(200)
(3,009)

***these items are assumed to be the same for actual and income statement for 2013

Notes:
A: AAG expects
additional
revenue
of $900million.
(Source:
http://www.cbsnews.com/news/american-a
smaller
gauge legacy
aircraft,
and longer
stage length.
Full year
domestic capacity is expected to be u
expected
be upRevenue:
approximately
7%cargo
vs. 2013."
2.
"Cargo to
/ Other
Includes
revenue, frequent flyer revenue, ticket change fees, excess
contract services, simulator rental, airport clubs and inflight service revenues."
(Source: Investor Relations Update, April 2014, American Airlines
B: "While the public sees US Airways as an integrated unit, it actually must operate as two separate c
C: The agreement would be around $190 million less than the $990 million American tentatively plans
D: "In 2013, special charges consisted primarily of a $192 million charge related to US Airways' pilot M
E: "They also anticipate cost savings of roughly $150 million." (Source: http://www.cbsnews.com/news
F: Source: http://www.cbsnews.com/news/american-airlines-us-airways-announce-11b-merger/

$ millions
Actual Income
Statement for
Merged
Company - AAG
for 2013 (23
days after
merger only)

Estimated
Income
Statement for
2013, assuming
merger at start
of year

Calculation of
Synergies for
Initial Days
after Merger

Calculation of Synergies for

Future Years

Note
Reference for
Assumption

Figure
e

d=a-c

20,218

28,646

387

3,131
685
2,709

6,151
812
3,991

(379)
8
(73)

26,743

39,600

(56)

1,250

7,839

12,065

(774)

10

5,460

9,162

877

3,326
768

1,142
947

4,181
775

1,260

1,736

361

1,152

1,841

72

(800)

1,050

559

4,782

(4,270)

334

853
1,158
2,969

1,364
535
3,855

(161)
(535)
756

606

25,344
1,399

38,479
1,120

20

25

(856)
(88)

(662)
280

(924)

(357)

475

763

(2,655)

(2,655)

(2,180)

(1,892)

(346)
(1,834)

(346)
(1,546)

349

1,631
1,574
1,200

150
1,400
1,200

374

200

nt for 2013

news.com/news/american-airlines-us-airways-announce-11b-merger/)
This is
capacity
is expected to be up approximately 1% and international capacity
is due to two main reasons:
ticket change fees, excess/overweight baggage fees, first and second bag fees,
es."

t operate as two separate carriers in which legacy US Air pilots and flight attendants can only fly on legacy US A
American tentatively plans to cut in labor costs. (Source: finance.fortune.com)
lated to US Airways' pilot MOU that became effective upon the close of the Merger, $96 million related to profes
p://www.cbsnews.com/news/american-airlines-us-airways-announce-11b-merger/) If the total cost savings are $1
ounce-11b-merger/

Estimated Income
Statement for 2014,
assuming Realisation
of Synergies
Calculated

f=a-e

28,884

6,530
1,428
4,064

40,906

11,281
10,839
5,323
1,722
2,097

1,913

1,399
178

1,203
0
4,005

39,960
946

27
(1,005)
402

(576)

0
0
(200)
200
-1.11

45.107

in reasons:

nly fly on legacy US Air planes and legacy America West pilots and flight attendants can only fly on legacy Amer

llion related to professional fees and fees for US Airways to exit the Star Alliance, a $107 million charge related
l cost savings are $150million, the cost savings individually identified are subtracted from this amount to find o

900

s can only fly on legacy America West planes. This prevents US Airways from achieving maximum fleet utilizatio

a $107 million charge related to the American's pilot long-term disability obligation, $58 million in severance, $5
ted from this amount to find out 'other' cost savings.

aximum fleet utilization that management says costs the airline $10 million a year." (Source: finance.fortune.co

million in severance, $56 million related to employee awards granted in connection with the Merger, a $43 millio

ce: finance.fortune.com)

e Merger, a $43 million charge for workers' compensation claims, and a $33 million impairment charge associat

ment charge associated with certain Boeing 757 aircraft held for sale. These charges were offset in part by a $3

e offset in part by a $31 million special credit related to a change in accounting method resulting from the modifi

sulting from the modification of American's AAdvantage miles agreement with Citibank, a $67 million gain on th

$67 million gain on the sale of slots at LaGuardia Airport as a result of the settlement reached with the DOJ and

ched with the DOJ and the cancellation of equity awards in connection with the Merger." (10-K 2013, AAG) The o

0-K 2013, AAG) The only costs excluding merger costs are severance costs and impairment charges (58+33).

nt charges (58+33).