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George Putnam, one of the country's leading turnaround and distressed investing professionals, shares his timely insight on the economy and turnaround investing opportunities.

Bankruptcy/Chapter 11 / Bonds / Mid Cap / Post-Bankruptcy Stocks / Transportation

AMR-USAir Merger: More Benefit for Competitors?

February 22, 2013

One of the top stories in the bankruptcy and turnaround investing world over the past few weeks has been the merger of US Airways with AMR Corp. (the parent of American Airlines). Most of the press coverage has discussed the effect on the two airlines that are merging. We believe that, in the short run at least, the principal beneficiaries of the merger may be their competitors, particularly Delta and United.

When large airlines merge, the integration of the two carriers usually proves much more difficult than anticipated. We saw this several years ago when US Air merged with America West and again more recently when United and Continental came together. Each airline has many key components--such as aircraft fleets, reservation systems, union contracts and myriad other things--and integrating these disparate components can cause headaches for the merger partners. For example, a large percentage of United Continental’s flights were grounded one day a few months ago when glitches appeared after the company tried to integrate the two legacy computer systems.

We expect that for at least the next several years, the costs of the USAir-AMR merger will be greater, and the synergies will be less, than the managements expect. Moreover, there could be significant snafus that will drive away customers, sending them to competitors.

These possible snafus are not the only potential benefits for the other airlines. They will also benefit from the reduced competition in the industry, as the number of major carriers is reduced by one.

For these reasons, we suggest that investors may want to focus more on the stocks of Delta and United Continental (both of which are on our Purchase Recommended List) than on US Air or AMR. At worst, Delta and United will get a small boost from industry consolidation. At best, they might get a big boost if integration problems at USAir-AMR drive customers away from the merged carrier to other airlines.

(Disclosure Note:  Accounts managed by an affiliate of the Publisher have positions in the securities of all four airlines.)

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George Putnam's Favorite Stocks for 2016

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2015 Bankruptcy Recap: 46% Increase Fueled by Oil & Gas/Mining Industry--Further Uptick Predicted

Looking back at 2015, research reveals a 14% decline in overall business bankruptcies but a 46% uptick in public company Chapter 11 filings—with a striking 51% of those filings coming from the battered Oil & Gas/Mining sectors. Economic indicators point to further increases in corporate bankruptcy, in general, and Energy-related filings, in particular. Just a few days into 2016, this viewpoint has already been validated by Arch Coal's long-awaited $8 billion Chapter 11 filing—and continuing oil price plummets severe enough that OPEC will likely convene an emergency meeting to address "shattered" economies. Read More.

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Spotlight: Junk Bond Market

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MarketWatch's Mark Hulbert recently tapped George's distressed investing expertise to determine the fate of the junk-bond market and what its nearly three-year decline likely means for your portfolio.

 

Hulbert writes, "What’s really going on? For insight, I turned to George Putnam, an expert in distressed-company investing. His Turnaround Letter advisory service has handily beaten the stock market over the past 15 years, according to the Hulbert Financial Digest’s tracking, by an impressive margin of 7.3 percentage points a year on an annualized basis."

 

Commenting on the rapid growth of high-yield exchange traded funds (ETF's), Putnam notes, "They have become the investment vehicle of choice for short-term investors….Those investors tend to be trend followers and, therefore, are just the opposite of being contrarian."

 

Read the full MarketWatch junk-bond article to find out what George thinks these recent indicators likely mean for future distressed investing profit.