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Until last week, American Airlines (AAMRQ.PK) insisted that it would come up with a reorganization plan allowing the company to be able to stand up on its feet. Recently, the company started to realize that this may not be possible after it was granted an extension till December to present its plan to the bankruptcy court. On Tuesday, the company's CEO Thomas Horton announced that he would be more open to the idea of a merger now if it benefits the parties involved. For many months, US Airways (LCC) has been waiting on the sidelines for an opportunity to finalize the merger, and now may be a good time for the company to make its move; however, there might be some competition in front of US Airways.

There are many stakeholders in this process including bondholders, union members and management of American Airlines. Everyone will be looking for the option that will benefit them the most. Earlier, the union members already declared an interest in a possible merger with US Airways. American Airlines will receive proposals from up to 5 different airlines and compare costs and benefits of each proposal before deciding on which route to take. After all, US Airways is not the only contender for the merger with American Airlines but it is thought to be the strongest candidate. The other candidates are reportedly JetBlue Airways (NASDAQ:JBLU), Alaska Airlines (NYSE:ALK), Frontier Airlines and Virgin America.

Because American Airlines is the third largest airline in the country by volume, a possible merger will create a very large airline company. The process may be lengthy and complicated, given unique cultures and ways of different airline companies. Despite the unique complexities in the industry, it is very common for airline companies to form partnerships or mergers as it becomes very difficult for many airline companies to stand on their own feet due to heavy volatility in the industry. For example, regulation changes, oil prices and the state of global economy play a direct role in profitability of airline companies.

The creditors of American Airlines formed a 9-member group and this group takes active role in the decision process. Of course, this group's main goal is to retrieve as much of their investments as possible and they will support the idea that makes this possibility most likely. The strong balance sheet of US Airways may lead the creditors to back the company for the merger. US Airways is very confident that its plan will be picked as the best one by the decision makers in this matter.

This week, American Airlines reached a tentative agreement with pilots, mechanics and ground workers. The company also hopes to reach an agreement with flight attendants, the only unionized group yet to reach an agreement with the company. The company's goal is to save $1 billion as a result of new contracts with the unions.

American Airlines has debt maturing on August 1st 2012 with a coupon of 9%. These bonds are currently priced at 55 cents per dollar. After that, the company will not have any maturing debt until 2014 when it will have 2 maturing debts. In July, the company's debt with a coupon of 10.32% will mature and in October, another debt with a coupon of 6.25% will mature. These debts are currently priced at 47 cents and 62 cents per dollar. The company's debt holders lost a lot of money, although it is not comparable to the money lost by the company's stockholders.

On the other hand, the sentiment for US Airways is very bullish. Year to date, the company's share price is up %173. Currently monthly call options yield between 3% and 8% depending on the strike price, which tells me that options community thinks highly of this company as well. The company is expected to more than double its earnings this year as it decided not to hedge on oil prices anymore. Whenever oil prices go down, it is bullish for the company.

I recently increased my shares in US Airways, but I will keep selling calls on my shares, just to be safe. Sometimes when a stock moves up so fast, pullbacks are inevitable in the short term. In the long term, US Airways should result in great returns regardless of whether it can merge with American Airlines or not. Merging with American Airlines would be great for the company; however, even if the merge doesn't happen, the company's balance sheet and cash flow still look very strong for the foreseeable future.

Source: American Airlines Is Becoming More Open To The Idea Of A Merger