U.S. Airways Group (LLC)‘s merger with American Airlines results in increased pricing power, economies of scale and higher barriers of entry in the airline industry, thus making LLC a solid value investment according to Warren Barnett, Founder and President of Barnett & Company.
“With the merger of U.S. Airways and American, we will have three carriers in the United States that will control 88% of the passenger revenues by volume,” Barnett said. “The airline industry now has higher barriers to entry than five or 10 years ago. And higher barriers to entry are good for the incumbents.”
This merger is a typical example of consolidation that leads to increased pricing power by the remaining participants, and now the only way to buy stock in the newly combined American Airlines is by investing in U.S. Airways, Barnett says.
“We think that there is significant operating leverage here, as well as the ability to have price discipline and economies of scale,” Barnett said.
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