Airline industry destined for more mergers

So much for a smooth ride to recovery for the nation’s fragile airline industry.

Just when airlines are emerging from bankruptcy and starting to post the best profits since 2001, the industry’s future is shakier than ever. But it doesn’t take a crystal ball to see that consolidation is on the horizon. It’s just a matter of when and how.

Crude oil prices are climbing dangerously toward $100 a barrel. The U.S. economy is slowing. Airline stocks are sinking. And labor costs are soaring.

“That’s a recipe for restructuring in the industry,’’ said Vaughn Cordle, CEO of Airline Forecasts in Washington. “There are just too many airlines right now. If the jet-fuel prices hold, something else will have to give.”

That “something else” will most likely come in the form of mergers and higher air fares.

Published reports last week that centered on a possible marriage of No. 2 United and No. 3 Delta were just a hint of what the future may hold, even if that particular alliance never comes to fruition.

Despite some talk airlines might try to rush into merger talks before a new administration takes over, some industry experts say nothing is likely to happen anytime soon.

Publicly, major carriers appear unwilling to take on the headache of risky mergers. To do so would mean months of strategic planning and consultation over labor issues, operating structures and regulatory approvals. And that’s before the Justice Department’s review process, which can take another 18 months to two years.

“I find it unlikely that a merger could be approved" before a new administration takes over in 2009, Cordle said.

While many airline executives are publicly denying they are in merger talks, some are conceding that consolidation is in their future.

Goldman Sachs analyst Robert Barry wrote Thursday that “all airline management teams and boards have been discussing consolidation ad nauseam, for months if not longer.” United Airlines has made no secret that it would entertain a partnership. And Northwest has been open to talks as well. But so far, airlines have been all talk and no action.

“Everybody’s filling up their dance cards but nobody’s dancing yet,’’ said airline analyst Ray Neidl with Calyon Securities.

Eager institutional investors want to reverse that trend. Last week’s less-than-subtle advice for Delta to merge with United was the latest example of the pressure airlines are under today to boost profitability.

Pardus Capital Management LP, a hedge fund that owns 7 million Delta shares, publicly disclosed that it had written a letter to Delta, calling on the airline to consider a merger with United. Pardus also owned 5.6 million shares of UAL as of Sept. 30.

Pardus came across like a chaperone pushing a reluctant suitor onto the dance floor. And such investor demands will become more aggressive if fuel costs continue to chip away at airline profitability.

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