Who would have imagined that the Delta (NYSE: DAL) merger with Northwest (NYSE: NWA), which was announced yesterday, could be scuttled by a merger of Continental (NYSE: CAL) and United (NASDAQ: UAUA)?

Most Wall St. observers believed that the unions were the largest barrier to the Delta deal. The pilots have not given the marriage their imprimatur. The captains may be able to hurt the merger by threatening a strike which could shut down the new carrier. Regulatory questions could be the other roadblock, but, as Reuters, points out "While the U.S. Justice Department is expected to work carefully, the agency’s track record on consolidation favors approval."

If the airlines can solve their labor issues, the merger, meant to offset the rise in fuel prices and fall in passenger revenue, is likely to happen.

All of that looked good until word began to get out yesterday that United and Continental do not think they can go it alone in the face of the Delta merger. It would put them at too much of a disadvantage as they maintain overlapping routes and duplicate costs for employees, planes, and maintenance. So, the boards of both companies are well along in the process of approving their own business combination.

The move by all four airlines to create two would be the straw that breaks the back of regulatory rubber stamping. Activist groups and members of Congress are likely to oppose the deal, perhaps appropriately, because having only four large airlines in the US, including AMR (NYSE: AMR) and US Air (NYSE: LLC), instead of six, might well hurt consumer choice and cause much higher ticket prices.

The mergers of four airlines would almost certainly lead to many cities having only one major carrier, a move that almost always spikes up ticket prices. It would also cause tremendous lay-offs at a time when unemployment will be up anyway. The Justice Department would have to look long and hard at those factors and that significantly hurts that chances of either merger going though.

Unless, of course, all four airlines want to get together and form just one carrier.

Douglas A. McIntyre

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