Airline Deal Gains Little Altitude in the Options Pits

UAL's (UAL Quote) planned $4.3 billion buy of US Airways (U Quote) had airline shares running every which way Wednesday, but options traders stood pat amid worries that the deal won't garner crucial labor support.

Volatility Index Today % Change 30.03 +2.49 Source: ILX

The deal sent airline stocks into a frenzy, with investors buying the shares of smaller airlines and selling potential acquirers amid talk of industry consolidation. US Airways nearly doubled on the news, jumping 21 15/16, or 83.4%, to 48 1/4, but traders couldn't dump UAL's stock fast enough: The parent of United Airlines saw its shares slide 9 3/16, or 15%, to 51 3/16.

Put/Call Ratio Today (Noon) Previous Close 0.46 0.41 Source: ILX

While the companies expect the deal to close next year, the takeover faces sizable hurdles. Most glaring are regulatory approvals and the airlines' powerful labor unions. So far, the pilots' union isn't exactly falling over the deal to endorse it.

"No one is playing it yet," one trader at a Wall Street firm said of the deal, citing uncertainty over the unions' position on the deal. The sense was that players view it "as a deal to stay away from, at first."

That sense gained steam when United Airlines Master Executive Council, a division of the Air Line Pilots Association, expressed "strong concerns over the proposed merger of United and US Airways and the impact of the proposed merger on the United pilot group."

PaineWebber stated in a report, "Without explicit labor endorsement and a highly refined integration plan, this deal won't fly."

Implied volatility, or the amount traders expect a stock to move, has risen a couple of points on UAL, though overall UAL options action remains quiet, a Chicago Board Options Exchange trader said at midmorning. Volume was most notable in UAL's out-of-the-money July 55 calls, where 602 contracts have changed hands. The calls were trading at 2 ($200), down 1/4 ($25).

Some analysts see the move by UAL as a signal that further consolidation in the airline industry is on the way, a possibility that has juiced up some airline stocks.

Merrill Lynch pegged Northwest Airlines (NWAC Quote) as a takeover candidate in a report Wednesday. Merrill wrote that the planned UAL-US Airways deal "is likely to set off a wave of consolidation in the industry, and Northwest, with a strategic asset in the Pacific, strong domestic hubs and a 13.5% economic (about 50% voting) interest in Continental (CAL Quote), is a very attractive acquisition candidate." Merrill upgraded shares of Northwest to intermediate-term accumulate from neutral and up to long-term buy from accumulate. Shares of Northwest were up 2 13/16, or 11.7%, to 26 15/16. Continental was up 2 15/16, or 7%, to 45.

Volume in Northwest options was light overall, however, most of the activity was on the call side. For the June 30 calls on the CBOE, about 170 contracts have traded. The contracts were changing hands at 3/4 ($75), up 3/16 ($18.75). Activity in Continental options was also thin.

Some analysts also said the proposed UAL-US Airways deal could force AMR (AMR Quote), parent of American Airlines, and Delta Air Lines (DAL Quote) to beef up their operations to remain competitive. Shares of AMR and Delta were getting punished. AMR was off 3 1/4, or 10%, to 29 3/8, while Delta was down 3 13/16, or 6.9%, to 51 3/8.

For more on the UAL-US Airways deal, check out Holly Hegeman's latest column.