US Airways Group, Inc. (LCC), AMR Corporation (AAMRQ), Delta Air Lines, Inc. (DAL): Three Big Ways to Play the Airline Merger Battle

But then a few things happened. Airline shares rallied with shares of major carriers doubling in value. This in turn both increased the value of the reorganized American Airlines and increased the value of the US Airways stock US Airways would be buying AMR Corporation (OTCBB:AAMRQ) with. US Airways and AMR went through negotiations and eventually came up with the merger and bankruptcy plan that exists today. Not only were creditors to be paid in full, but there was some left over for AMR common stockholders.

The current plan gives AMR common stockholders 3.5% of the new American Airlines Group but the market-based old equity allocation gives AMR common stockholders a large percentage of the new AAG as the price of US Airways shares moves above $14.99. The following table shows how this amount increases.

Source: U.S. Bankruptcy Court documents

The value of AMR common shares increases faster than linear growth, and if the merger is approved, US Airways shares should increase in value, potentially doubling the current value of AMR common shares.

But AMR shares come with significant downside as well. If the merger fails, AMR creditors could no longer be paid in US Airways-AAG stock and the restructured AAG would likely need more capital to be stable enough on its own. Under this situation, AMR common stockholders are likely to receive little if anything in the bankruptcy plan.

Take your pick
The airline industry offers something for investors of varying risk levels. Airlines not active in the merger stand to benefit from industry consolidation in general while the merging partners themselves offer additional upside and risks due to their involvement in the merger. I am personally bullish on the industry and have holdings across many airlines, whether part of this merger or not. Investors interested in making an investment in the industry should examine their risk tolerance and decide which investments to pursue.

The article Three Big Ways to Play the Airline Merger Battle originally appeared on Fool.com and is written by Alexander MacLennan.

Alexander MacLennan owns shares of American Airlines, Delta Air Lines. He is also long the following options: $22 January 2015 Delta calls, $25 January 2015 Delta calls, $30 January 2015 Delta calls, $17 January 2015 US Airways calls. The Motley Fool has no position in any of the stocks mentioned.

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