Merger talk spurs unusual jump in UAL stock

By Deepa Seetharaman and Kyle Peterson – Analysis

NEW YORK (BestGrowthStock) – Shares of UAL Corp (UAUA.O: ) have surged 18 percent in the past week on talk that the parent of United Airlines was discussing a merger with US Airways Group (LCC.N: ).

That is an odd stock reaction for a company that presumably is the acquirer. Shares of the buyer typically fall on merger reports. But analysts say it reflects a growing belief that there is more to the story than has been reported.

They think UAL itself is a takeover target for Continental Airlines (CAL.N: ). Neither UAL nor US Airways have confirmed the reported merger talks, and Continental has been mum on its own ambitions.

“The press reports out there say United is involved in merger talks. The question is, ‘Are they the buyer or the ‘buyee?'” Helane Becker, analyst with Jesup & Lamont Securities said. “I think people want to own United in case it becomes a ‘buyee.'”

UAL’s stock rally also renews industry optimism that consolidation can enable airlines to raise fares and cut costs.

The Arca Airline index (.XAL: ) has risen about 7.4 percent in the five trading days ending April 14, marking the index’s best 5-day run in almost two months.

US Airways stock has risen about 9 percent since April 7, when the merger talks were cited in media reports. Shares of Continental, the No. 4 U.S. airline, have jumped 13 percent.

Analysts have said a potential United-US Airways union could marginalize Continental, making it a significantly smaller player among increasingly larger airlines.

In a note this week, Stifel Nicolaus analyst Hunter Keay said Continental will likely make a go for United partly as a defensive maneuver. Other analysts have also said a merger between United and Continental makes more strategic sense.

“Continental could have a fleeting chance to create the world’s largest airline with United, or it could end up dwarfed in fourth place in the U.S. market by the top three,” Gimme Credit analyst Vicki Bryan said in a research note.

Continental and United talked about merging in 2008 before Continental balked, opting instead to join the Star Alliance, an airline network that includes United and US Airways.

IN PURSUIT OF PROFITS

Earlier this year at the Reuters Travel & Leisure Summit, the chief financial officers of both US Airways and United emphasized that consolidation was needed for the U.S. airline industry to post profits.

Bryan, Keay and other analysts say consolidation is needed to help defray costs and lift fares.

Airfares in the third quarter of 2009 were 6.6 percent higher than in the same period in 1995, according to the Bureau of Transportation Statistics.

By contrast, consumer prices rose 41 percent from September 1995 to September 2009, the BTS said.

“We basically have the same fares we’ve had for 20 years,” Bryan said, in an interview. “If you had the same salary you had 20 years ago, how would you cover your costs for today?”

Some industry experts say the time is ripe for a merger, given improving traffic figures and signs that air travel demand from business travelers is rebounding.

“There’s been a lot of optimism out there,” said Morningstar analyst Basili Alukos. “Credit is continuing to get better, so the cost of capital for these carriers have fallen. So that ultimately becomes a benefit.”

Rising oil prices also are spurring consolidation, analysts said. Last week, oil climbed to an 18-month high of $87.09 a barrel. That is well off its lifetime peak near $150 reached in 2008, but burdensome to airlines nonetheless, experts say. On Wednesday, the price reached a high of $86.39.

The last U.S. airline merger was in 2008 when Delta Air Lines (DAL.N: ) bought Northwest Airlines to form the world’s largest carrier. Globally, British Airways (BAY.L: ) and Spain’s Iberia (IBLA.MC: ) merged recently.

Delta has a market capitalization of $11.4 billion, as of Wednesday. That exceeds the combined market value of Continental, US Airways, United and AMR Corp’s (AMR.N: ) American Airlines.

“The world is merging all around them,” Bryan said, of the other U.S. network carriers. “The global airlines are merging, trying to compete with Delta. To do that, you’ve got to be big.”

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(Reporting by Deepa Seetharaman; Editing by Richard Chang)

Merger talk spurs unusual jump in UAL stock