** Shares in Brazilian airlines Azul AZUL4.SA and Gol GOLL4.SA jump as the companies inch closer to a potential merger

** Azul and Gol's parent Abra Group signed a non-binding memorandum of understanding aimed at combining the firms, the first of several steps on the path to completing a deal

** The union of the two companies would hold roughly 60% of Brazil's domestic market, surpassing rival LATAM Airlines LTM.SN

** Seaport Research Partners analysts say the size of Brazil's traveling population supports just two airlines economically, given the industry's heavy reliance on U.S. dollar financing and the foreign exchange rate volatility

** "A deal is not only necessary, the economics for both airlines (and their respective bondholders) are too compelling to pass up," they say, upgrading Azul to "Buy" from "Neutral"

** Shares of Azul rise 6% in morning trading, after soaring as much as 12.2% earlier in the session

** Gol's shares are up 11%, having jumped as much as 19.5%

** Brazil's benchmark stock index Bovespa .BVSP slides 0.4%

(Reporting by Gabriel Araujo)

((Gabriel.Araujo2@thomsonreuters.com; +55 11 5047-3352;))