Another Big Airline Merger?

That's right, folks. Here we go again. The rumor mill on Wall St. is buzzing with yet another big airline merger. After the surprisingly successful merger with Delta and Northwest, it looks like United and US Airways are discussing tying the knot...again. The combination would create the world's second largest airline (behind the aforementioned Delta/Northwest combination) with large operations in virtually every corner of the country (San Fran, Phoenix, DC, Chicago, Philly). But, at the same time, I think it might cause some headaches as well.

History Repeating Itself

This isn't the first time United and US Air have tried to get together. In 2001, the two airlines had a merger agreement that was shot down by the US Justice Dept. on antitrust grounds (ironically enough, both airlines declared bankruptcy a couple of years later). Nonetheless, the two airlines do have some synergies that make a merger sensible. A complimentary route structure, a decent amount of fleet overlap, and the same alliance affiliation would all make a merger makes sense. Furthermore, US Airways has a history of financial under performance and, to shareholders, it may make good sense to combine with a bigger competitors.

Industry Tailwinds

Another good argument for industry consolidation is pricing power. There were two major components of pain for the airline industry this decade which resulted in billions of dollars in loses - higher costs (mainly due to oil prices rising) and lower ticket prices. Because of the huge expansions over the years, the major airlines needed to lower prices to compete. The conslidation of a United/US Air would reduce this competition and allow airlines to increase revenue.

Of course, this is a double-edge sword. Increased pricing power means higher fares for you and me. As much as it might be painful, in my mind it's an inevitability that has already begun.

But of Course There's a Twist

Although there does appear to be serious merger discussion between the two carriers. There are thoughts that United is talking to US Air as a negotiation tactic with another airline - Continental. United has also been courting Continental for a some time now, but the Houston based carrier has refuted offers. The prevailing thought is United is hoping to bring Continental back to the table when it feels that it might be at a disadvantage with a United/US Air tie up.

In other words...stay tuned!

How to Trade Through This

I've said in the past and I'll say it again...I never recommend investing in airlines long-term. However, in this case, I do think there are some opportunities for TRADING through this news (i.e. short term investing of 6 months or less). But I wouldn't buy any of the names involved in the mergers here, there's others that I think can benefit:

1. Alaska Airlines - The airline's size and market niche make it a perfect takeover candidate - especially for American Airlines. Another big merger might force AMR to make a move as well, and Alaska could be a great catch.
2. JetBlue - The airline has had some rough patches, but pricing power could bring some positive upside for the airline.
   

The airline industry is extremely dynamic and full of surprises. Stay tuned to InvestingDecoded for the latest updates and what they mean to you. Of course, you might also get some ideas on how to invest in it.

What are your thoughts?

Questions/Comments/Feedback?
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The Standard Disclaimer:

The stuff I just wrote above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I've said above. This includes consulting with a financial advisor.