acquirorAcquiror: US Airways - LCC (assuming no merger)Actual
Results ($ million)Trends in Revenues (% changes)Trends in Expenses
(% of revenues)Forecast Income Statements ($
millions)201220112010200920082012-112011-102010-092009-08average20122011201020092008average20132014201520162017201820192020Operating
revenues:Mainline
passenger8,9798,5017,6456,7528,1835.611.213.2(17.5)3.19,2619,5529,85210,16110,48010,80911,14811,498Express
passenger3,3263,0612,8212,5032,8798.78.512.7(13.1)4.23,4663,6113,7633,9214,0864,2584,4374,623Cargo155170149100144(8.8)14.149.0(30.6)5.9164174184195207219232246Other1,3711,3231,2931,2541,0383.62.33.120.87.51,4731,5831,7021,8291,9652,1122,2702,439Total
operating
revenues13,83113,05511,90810,60912,24414,36414,92015,50116,10616,73817,39818,08718,806Operating
expenses:Aircraft fuel and related
taxes3,4893,4002,4031,8703,97425.226.020.217.632.524.33,4913,6273,7683,9154,0684,2294,3964,571Salaries
and related
costs2,4882,2722,2442,1652,23118.017.418.820.418.218.62,6682,7712,8792,9913,1093,2313,3593,493Express
expenses3,1623,1272,7292,6283,13922.924.022.924.825.624.03,4513,5853,7243,8704,0224,1804,3464,519Aircraft
rent6436466706957244.64.95.66.65.95.57958268588929279631,0021,041Aircraft
maintenance6726796617007834.95.25.66.66.45.78228548879219589951,0351,076Other
rent and landing
fees5565555495605624.04.34.65.34.64.6654679705733762792823856Selling
expenses4664544213824393.43.53.53.63.63.5505524545566588611636661Special
items, net3424555760.20.20.00.50.60.34648505254565861Depreciation
and
amortization2452372482512241.81.82.12.41.82.0283294306318330343357371Other1,2201,2351,1971,1811,8658.89.510.111.115.210.91,5711,6321,6961,7621,8311,9031,9792,057Total
operating
expenses12,97512,62911,12710,48714,01714,28714,84015,41716,02016,64817,30417,99018,705Operating
income856426781122(1,773)77808386909397101Nonoperating income
(expense):Interest income24132483Interest expense,
net(343)(327)(329)(241)(218)Other, net122(13)37(83)(240)Total
nonoperating expense,
net(219)(336)(279)(300)(375)(1.6)(2.6)(2.3)(2.2)(311)(323)(336)(349)(363)(377)(392)(407)Income
before income
taxes63790502(178)(2,148)(234)(243)(253)(263)(273)(284)(295)(307)Income
tax provision0190(38)00.00.10.00.072222222Net
income63771502(140)(2,148)(241)(245)(255)(265)(275)(286)(297)(309)add:
depreciation283294306318330343357371FCF4249515355576062Earnings per
common share:Basic earnings per share3.920.443.11Diluted earnings
per share3.280.442.61Shares used for computation (in
thousands):Basic162,331162,028161,412Diluted203,978163,743201,131
targetTarget: American Airlines - AMR (assuming no merger)
Actual Results ($ million)Trends in Revenues (% changes)Trends
in Expenses (% of revenues)Forecast Income Statements ($
millions)201220112010200920082012-112011-102010-092009-08average20122011201020092008average20132014201520162017201820192020Operating
revenues:Mainline
passenger18,74317,94716,76015,03718,2344.47.111.5(17.5)1.418,99819,25719,51919,78420,05320,32620,60320,883Passenger
- regional
affiliates2,9142,7242,3272,0122,4867.017.115.7(19.1)5.23,0643,2223,3883,5633,7473,9404,1434,357Cargo669703672578874(4.8)4.616.3(33.9)(4.5)639611583557533509486465Other24992583239122902172(3.3)8.04.45.43.72,5902,6852,7832,8852,9903,1003,2133,330Total
operating
revenues24,82523,95722,15019,91723,76625,29225,77526,27426,79027,32327,87528,44529,035Operating
expenses:Aircraft fuel and related
taxes8,7177,4345,7316,8076,65535.131.025.934.228.030.87,8007,9498,1038,2628,4268,5968,7728,954Salaries
and related
costs6,2426,3856,2275,5539,01425.126.728.127.937.929.17,3717,5127,6577,8077,9638,1248,2908,462Regional
payments to AMR
Eagle*1,1422,4182,2271,3531,2984.610.110.16.85.57.41,8722,1712,1712,1712,1712,1712,1712,171Aircraft
rent5506735921,1041,2072.22.82.75.55.13.79279449639821,0011,0211,0421,064Aircraft
maintenance1,1331,0201,0561,2801,2374.64.34.86.45.25.01,2761,3001,3251,3511,3781,4061,4351,465Other
rent and landing
fees1,2861,3051,2848539975.25.45.84.34.25.01,2601,2841,3091,3341,3611,3881,4171,446Commissions,
booking fees and credit card
expense1,0501,0629765054924.24.44.42.52.13.58949119299479669851,0061,026Special
items,
net38672504875181.63.00.02.42.21.8466475484493503513524535Depreciation
and
amortization9999509351711,2134.04.04.20.95.13.69199379559749931,0131,0341,055Food
service535518490002.22.22.20.00.01.3330337343350357364371379Other2,7442,6372,4812,8083,02411.111.011.214.112.712.03,0393,0973,1573,2193,2833,3503,4183,489Total
operating
expenses24,78425,12721,99920,92125,65526,15326,91527,39527,89028,40228,93229,47930,046Operating
income41(1,170)151(1,004)(1,889)(861)(1,141)(1,121)(1,100)(1,079)(1,057)(1,034)(1,011)Nonoperating
income (expense):Interest income25252534181Interest expense,
net(662)(689)(654)(744)(803)Other, net280(14)(26)(38)393Total
nonoperating expense,
net(357)(678)(655)(748)(229)(1.4)(2.8)(3.0)(2.4)(609)(621)(633)(645)(658)(671)(685)(699)Income
(Loss) Before Reorganization Items,
Net(316)(1,848)(504)(1,752)(2,118)(1,470)(1,762)(1,754)(1,746)(1,737)(1,728)(1,719)(1,710)Reorganization
Items, Net**(2,179)(116)000(8.8)(0.5)0.0(3.1)(781)(796)000000Income
(Loss) Before Income
Taxes(2,495)(1,964)(504)(1,752)(2,118)(2,251)(2,557)(1,754)(1,746)(1,737)(1,728)(1,719)(1,710)Income
tax
(benefit)(569)0(35)(284)0(2.3)0.0(0.2)(0.8)(207)(210)(215)(219)(223)(228)(232)(237)Net
Income
(Loss)(1,926)(1,964)(469)(1,468)(2,118)(2,045)(2,347)(1,539)(1,527)(1,514)(1,501)(1,487)(1,473)add:
depreciation9199379559749931,0131,0341,055FCF(1,125)(1,410)(584)(553)(521)(488)(453)(417)
*These are payments under a Purchase Agreement, between AMR and
its wholly-owned subsidiary, AMR Eagle, which are not recurring
costs.**These are assumed to be non-recurring from 2015
onwards.
mergedMerged CompanyABA+BForecast Income Statements ($
millions)Forecast Income Statements ($
millions)Difference201320142,0152,0162,0172,0182,0192,020Percentage
increase in salesExpenses as a percentage of
revenue2013201420152016201720182019202020132014201520162017201820192020Actual
ResultsIncluding Merger and Restructuring CostsStart of Realization
of SynergiesHorizonOperating revenues:Mainline
passenger20,21828,80829,45630,11930,79731,49032,19832,9232.2528,25928,80829,37029,94530,53331,13531,75132,381Passenger
- regional
affiliates3,1316,8347,1537,4887,8398,2058,5898,9914.686,5306,8347,1527,4847,8338,1988,5808,980Cargo6857857907968028088148200.74803785768753739728718710Other2,70936,42638,45240,59142,84845,23147,74650,4015.5635,59236,42637,28938,18239,10540,06141,04942,072Total
operating
revenues26,74372,85376,75279,89483,18586,63490,24894,03571,18572,85374,57976,36478,21180,12282,09884,143Operating
expenses:Aircraft fuel and related
taxes7,83911,57521,16322,02922,93723,88811,73225,92827.5711,29111,57511,87012,17712,49512,82513,16913,525Salaries
and related
costs5,46010,28318,31219,06119,84720,66921,53122,43523.8610,03910,28310,53610,79911,07211,35511,64911,955Regional
payments to AMR
Eagle*3,3265,75612,06112,55513,07213,61414,18214,77715.715,3235,7565,8956,0416,1926,3516,5166,689Aircraft
rent7681,7713,5313,6763,8273,9864,1524,3264.601,7221,7711,8211,8731,9281,9852,0442,105Aircraft
maintenance1,2602,1544,1314,3004,4774,6634,8585,0615.382,0972,1542,2122,2732,3362,4012,4692,540Other
rent and landing
fees1,1521,9633,6573,8073,9644,1284,3014,4814.771,9131,9632,0142,0672,1222,1802,2402,302Commissions,
booking fees and credit card
expense1,1581,4352,7052,8162,9323,0533,1813,3143.521,3991,4351,4731,5131,5541,5971,6411,687Special
items,
net55952383086416,6379379761,0171.08512523534545557569582595Depreciation
and
amortization8531,2312,1522,2402,3322,4292,5302,6372.801,2031,2311,2611,2911,3231,3561,3911,426Others2,9695,0668,8109,1709,5489,94410,35910,79311.484,9415,0665,1965,3315,4715,6175,7685,926Total
operating
expenses25,34441,75677,20280,36999,42387,16177,65194,62040,44041,75642,81243,91045,05046,23647,46948,751Operating
income1,39931,097(450)(474)(16,238)(527)12,596(585)30,74431,09731,76732,45433,16133,88534,62935,392Nonoperating
income (expense):Interest income20Interest expense, net(856)Other,
net(88)Total nonoperating expense,
net(924)(944)000000(920)(944)(969)(994)(1,021)(1,048)(1,077)(1,107)Income
(Loss) Before Reorganization Items,
Net47530,153(450)(474)(16,238)(527)12,596(585)29,82430,15330,79831,46032,14032,83733,55234,285Reorganization
Items, Net***2,6551,200000000(781)(796)000000Income (Loss) Before
Income
Taxes(2,180)28,953(450)(474)(16,238)(527)12,596(585)30,60530,94930,79831,46032,14032,83733,55234,285Income
tax
(benefit)(346)10,134(157)(166)(5,683)(185)4,409(205)(200)(209)(213)(217)(221)(226)(230)(235)Net
Income
(Loss)-1,8341,2312,1522,2402,3322,4292,5302,6371,2031,2311,2611,2911,3231,3561,3911,426008919491,0091,0731,1401,210add:
depreciation8531,2312,1522,2402,3322,4292,5302,6371,2031,2311,2611,2911,3231,3561,3911,426PV(net
synergies):
143,972FCF(981)2,4624,3044,4804,6654,8585,0615,2732,4052,4622,5222,5832,6472,7132,7812,853
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 revenue ratio for pre-merger companies.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 &1,000million, respectively. Details of these figures
are:A: AAG expects additional revenue of $900million. (Source:
http://www.cbsnews.com/news/american-airlines-us-airways-announce-11b-merger/)
This is due to two main reasons:1. "Capacity: Total system capacity
is expected to be up approximately 3% vs. 2013 primarily due to
more active aircraft, larger gauge aircraft replacingsmaller gauge
legacy aircraft, and longer stage length. Full year domestic
capacity is expected to be up approximately 1% and international
capacity isexpected to be up approximately 7% vs. 2013."2. "Cargo /
Other Revenue: Includes cargo revenue, frequent flyer revenue,
ticket change fees, excess/overweight baggage fees, first and
second bag fees,contract services, simulator rental, airport clubs
and inflight service revenues."(Source: Investor Relations Update,
April 2014, American AirlinesB: "While the public sees US Airways
as an integrated unit, it actually must operate as two separate
carriers in which legacy US Air pilots and flight attendants can
only fly on legacy US Air planes and legacy America West pilots and
flight attendants can only fly on legacy America West planes. This
prevents US Airways from achieving maximum fleet utilization that
management says costs the airline $10 million a year." (Source:
finance.fortune.com)C: The agreement would be around $190 million
less than the $990 million American tentatively plans to cut in
labor costs. (Source: finance.fortune.com)D: "In 2013, special
charges consisted primarily of a $192 million charge related to US
Airways' pilot MOU that became effective upon the close of the
Merger, $96 million related to professional fees and fees for US
Airways to exit the Star Alliance, a $107 million charge related to
the American's pilot long-term disability obligation, $58 million
in severance, $56 million related to employee awards granted in
connection with the Merger, a $43 million charge for workers'
compensation claims, and a $33 million impairment charge associated
with certain Boeing 757 aircraft held for sale. These charges were
offset in part by a $31 million special credit related to a change
in accounting method resulting from the modification of American's
AAdvantage miles agreement with Citibank, a $67 million gain on the
sale of slots at LaGuardia Airport as a result of the settlement
reached with the DOJ and the cancellation of equity awards in
connection with the Merger." (10-K 2013, AAG) The only costs
excluding merger costs are severance costs and impairment charges
(58+33).E: "They anticipate total cost savings of roughly $1,000
million." (Source:
http://www.cbsnews.com/news/american-airlines-us-airways-announce-11b-merger/)
If the total cost savings are $150million, the cost savings
individually identified are subtracted from this amount to find out
'other' cost savings.F: Source:
http://www.cbsnews.com/news/american-airlines-us-airways-announce-11b-merger/
DCFValuation of target assuming no
merger20132014201520162017201820192020horizonnet income
($millions)(1,125)(1,410)(584)(553)(521)(488)(453)(417)(417)year123456788WACC0.110.110.110.110.110.110.110.110.11sustainable
growth0.066($3,912)(4,068)or:($7,980)millionor:($7.98)billion
Valuation of acquiror assuming no merger (stand-alone
valuation)20132014201520162017201820192020horizonnet income
($millions)424951535557606262year123456788WACC0.050.050.050.050.050.050.050.050.05sustainable
growth0.040$3393,042or:$3,381millionor:$3.38billionValuation after
merger20132014201520162017201820192020horizonnet income
($millions)(981)2,4624,3044,4804,6654,8585,0615,2735,273year123456788WACC0.070.070.070.070.070.070.070.070.07sustainable
growth0.066$20,451344,660or:$365,111millionor:$365.11billion
price range & comparablesDetermination of offer price
range:min = max[PV(target),MV(target)]PV = (7,980)MV* = 90Hence,
min = 90max = min + PV(NS)PV(NS)*** = $143,971.66Hence, max =
144,062
alpha** = 0.11PV(OP) = 16,087price range: 90