U.S. Airways Group, Inc. (NYSE:LCC) and AMR Corporation (PINK:AAMRQ) are reported to be making progress towards the much anticipated merger between the two to create the world’s largest airline.

Even though the much publicized differences on valuations are still not resolved, people with knowledge of the matter claim a deal is possible within a week.

This implies that, pressured by its creditors, AMR’s Tom Horton is getting serious about the merger. At first, Horton believed American Airlines would be able to successfully navigate through the bankruptcy on its own but has come under pressure from AMR’s bondholders and has agreed to consider all options. Unfortunately, these options are not many as there is no other suitor for AMR Corporation.

US Airways and AMR

According to initial reports, the combined entity would be headed by U.S. Airways’ Chief Executive Doug Parker while AMR Corporation’s (PINK:AAMRQ) Tom Horton would become non-executive chairman of the board.

Horton is expected to remain on the scene until the transition is completed. The transaction, likely to involve stock but no cash, will possibly value the combined entity between $10.5 billion and $11 billion – enough to put it ahead of United Continental Holdings Inc (NYSE:UAL).

The combined carrier would still be behind Delta Air Lines, Inc. (NYSE:DAL) which has over $12.5 billion in terms of market capitalization. Under the terms of the deal, AMR creditors would get to own 72 percent of the new company while the remaining will rest with U.S. Airways Group, Inc. (NYSE:LCC) shareholders.

As mentioned earlier, nothing has been set in stone as yet and negotiations can take a u-turn from here too although the probability of something like this happening is very remote now. AMR bondholders are believed to have given a deadline of Feb. 15 which is the expiration date for non-disclosure agreements they signed with the two airlines.

Enough has already been written about the benefits of the merger and how the combined entity will have little overlap and would enjoy synergies anywhere between $1 billion and $2 billion annually.

What retail investors need to know is if there is a way to benefit from the deal and if yes, how? Unfortunately, the hailed transaction falls flat in this department. For any diehard optimist still following Tom Horton, it would be plain wastage of money to buy AMR’s inflated shares. Yes, the shares are up nearly threefold over the past quarter, but these shares are not likely to find a place in the larger scheme of things.

From the standpoint of buying U.S. Airways Group, Inc. (NYSE:LCC) stock, the story of leveraging synergies will unfold over a longer term and will be subject to several operational issues including the whole integration exercise. The stock is already up substantially and is trading close to its 52 week high. Considering the vastly improved results the company has posted in the recent quarters, this is justified but simultaneously opens a downside too.

As many experts reckon, mergers and acquisitions face many unknown challenges during the integration of operations. The downside for U.S. Airways shares, which are already flying high, could easily be bigger than the potential gains.

What it eventually boils down to is a zero sum game in which the benefits of the transaction are already factored in U.S. Airways stock prices. The combined entity would certainly be a reason to worry for its main competitors United Continental Holdings Inc (NYSE:UAL) and Delta Air Lines, Inc. (NYSE:DAL). Both are anyway preparing to boost margins by cutting flying capacity – enabling the companies to charge more for remaining seats.

It is not clear as yet what strategy the new American Airlines would adopt to match its competitors’ margins but initially the company will have an advantage in undercutting its rivals as lower margins would be more than acceptable amid restructuring and integration charges.