Another High-Flying Courtship?

If not for the winter chill outside, I'd swear it was June. How else do you explain everyone wanting to get hitched? Just 11 days ago, U.S. Airways (NYSE: LCC  ) proposed to Delta. Now, it seems Air France-KLM (NYSE: AKH  ) is seeking the hand of Alitalia, the Italian national carrier that is also partly run by the state.

Air France chief executive Jean-Cyril Spinetta confirmed preliminary talks with Alitalia as it reported earnings for the July-to-September period. The timing of a deal probably couldn't be better; Air France improved its quarterly net profit by 26% year over year to 364 million euros.

Still, Air France investors so loathe the prospect of a combination that they're dumping the stock faster than Fox ran away from O.J. Shares of the carrier have tumbled by roughly 9% since the Associated Press first reported the talks on Thanksgiving.

That's hardly surprising; Alitalia hasn't turned a profit in four years and lost 65.8 million euros in its most recent quarter, the AP reports. What's more, Air France management says the talks are "exploratory" and were made at Alitalia's request. It's as if the Italian airline is asking for a handout. Or, worse, a bailout.

Maybe it is. It's not as if the airline industry has completely recovered. Softness in the sector has led to a descent at JetBlue (Nasdaq: JBLU  ) and bankruptcy for both Delta and Northwest.

In other words, Alitalia is hardly alone in seeking shelter from the headwinds, which means more deals could be in the works. Here are three I think are possible and perhaps even likely:

  • Continental-United: I won't spill much ink on details here, since I've already covered a possible merger between UAL Corp. (Nasdaq: UAUA  ) and Continental (NYSE: CAL  ) . Let's just say there's little obvious overlap between the two except where it counts most: in the fleets.
  • American-Northwest: Though Northwest is technically part of Continental's SkyTeam alliance, it's AMR Corp's (NYSE: AMR  ) American that could most benefit from a combination. At the very least, Northwest's Asian operations would help American better compete against United internationally, where its rival is at its strongest.
  • British Airways-American: The Times of London recently reported that private equity firms were investigating British Airways (NYSE: BAB  ) for a buyout deal at roughly the same time that investors bid $8 billion for Australian carrier Qantas. Don't think that managers at both BA and AA haven't thought of the same, especially since British Airways and American are already partners in the "oneworld" alliance of global airlines.

Exactly none of these deals may come to pass, of course. But I doubt it. There's simply too much money for private equity investors to put to work and too many problems with the airline industry, all of which have been temporarily hidden by lower oil prices. Mergers and buyouts could allow overburdened carriers to substantially trim their operations while making stock-holding executives millions. Surely Alitalia CEO Giancarlo Cimoli isn't the only one who knows that.

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Fool contributor Tim Beyers has 31 picks in his Motley Fool CAPS portfolio, including UAL, which he believes will outperform the S&P 500. He doesn't, however, have real money in the airline or in the stocks of any of the other firms mentioned in this article. What's your take on the airline industry? Get in the game and let us know.

Meanwhile, you can get an inside peek at all the stocks Tim owns by checking his Fool profile. The Motley Fool's disclosure policy is always on time for departure.


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