Can AA and US Airways Together Become #1?

Talks are underway that could replace United Continental Holdings Inc. (NYSE:UAL) with a merged American Airlines (AAMRQ.PK) and US Airways (NYSE:LCC) as the world’s largest airline.

American Airlines and US Airways have been considering a merger for a short while, but there are no open talks or announcements about a plan to merge, and details on the matter are private. The merger is not firm, and could fall through, as there is still a lot for unsecured creditors to decide, such as who will run the new merged company and how to divide equity. But there’s no denying the power of such a rumor. After all, it has the potential to boot United Continental from its number-one spot, while significantly boosting the US Airways’ reach.

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CHEAT SHEET Analysis: Will a merger boost stocks?

One of the core components of our CHEAT SHEET Investing Framework focuses on catalysts that will move a company’s stock. Mergers, acquisitions, and joint ventures are always events investors should watch closely. How much money is being spent? How quickly will shareholders recognize a return on investment?

The merger would come at a tricky time, as American Airlines has filed for bankruptcy, and it will be hard for the airlines to decide whether American Airlines should make the merger while in bankruptcy or wait. Though there is much to decide, it sounds as if the merger is inevitable, and the airlines are already going so far as to set work rules for the pilots until a joint contract is negotiated.

The way things are shaping up, it seems a merger would be good for both airlines. Even peremptorily, shares are raising, with shares more than doubling this year for US Airways in anticipation of a merger. However, the new merged entity will have to prove itself viable — American Airlines’ reputation was sullied when the company was forced to declare bankruptcy. Both airlines will have to prove that they are stronger together than they are apart if investors are going to get behind this merger 100%.

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