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Ownership rules clip wings of U.S. airline profits

Reuters Breakingviews delivers agenda-setting financial insight. Its global correspondents react to stories as they develop, delivering sharp and provocative commentary on big financial news as it breaks.

U.S. airlines need to fly abroad for better returns. The $11-billion (U.S.) union of US Airways and AMR should boost the industry's profitability. But earnings won't be able to pick up more altitude until America's airlines team up with overseas rivals. Some such deals could nearly double margins. But it requires Congress to lift curbs on foreign ownership.

Right now Wall Street analysts reckon America's two largest airlines are winging their way to solid profits. The consensus is that Delta will land $2.2-billion this year, a 5.8-per-cent net margin, while United Continental is on course for $1.5-billion, or a 3.8 per cent margin. That would be pretty robust, but investors are more skeptical – Delta's stock trades at just over five times and United's just under seven times those estimates. And that's after a 60-per-cent surge for Delta over the past six months and a 45-per-cent rally for United.

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That's probably a tad unfair. After the AMR-US Airways merger, four airlines will control more than 80 per cent of domestic routes. That caps eight years of consolidation for U.S. carriers. And since 2008 alone, available seat miles on U.S. airlines have fallen by about 15 per cent, according to industry body Airlines for America. All in, that should mean fewer destructive price wars and more efficient carriers. But fears of a return to old practices – and of oil price hikes – clearly remain.

Merging with an overseas airline would bolster the income statement. Granted, there aren't too many profitable airlines to choose from right now. But assume United hooked up with Japan's All Nippon Airways (ANA) and managed to cut costs equal to 2 per cent of combined revenue – the midpoint of recent domestic U.S. mergers. That would, based on forward earnings estimates and current low tax rates, mean a combined net margin of 5.6 per cent. Run the same calculation for a Delta-ANA tie-up, and the joint net margin would hit 7 per cent.

There's just one sticking point: Outdated security fears limit foreign fliers to having no more than a 25-per-cent stake in American carriers. Lifting that would be a smart thing to do.

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