With the latest merger between US Airways and AMR, American Airlines Group (NASDAQ: AAL) is almost certainly the last of the North American airline megamergers. But there are some smaller carriers that have merger possibilities, and the futures of these carriers affect those of big and small airlines alike.

Growing through Hawaii
Unless you live in Hawaii, on the West Coast, or in a major city, there's a good chance you've never heard of Hawaiian Airlines, owned by Hawaiian Holdings (NASDAQ: HA). But while major carriers are trying to restrict capacity growth, Hawaiian is growing into new markets.

With the vast majority of its revenue coming from travel between the west coast of the United States and Hawaii, Hawaiian Airlines is seeking to diversify and expand. Ordering a new set of jets with improved fuel efficiency and range, Hawaiian is moving into the Pacific markets with flights to Australia, New Zealand, China, and Japan. With potential for additional growth in emerging Asian markets, Hawaiian Airlines is both a U.S. tourism investment and an emerging markets investment.

Hawaiian Airlines is not currently a member of any of the three major airline alliances preferring to form partnerships with individual carriers instead. This means that an airline acquiring Hawaiian would gain a new alliance member regardless of which alliance the acquiring airline is a member of. In addition, much of Hawaiian's network would be new additions to that of a major airline. This lack of overlap would allow an acquiring carrier to more efficiently obtain a larger network while making the antitrust process less difficult.

Northeast favorite
Since its founding in 1998, JetBlue Airways (NASDAQ: JBLU) has held valuable real estate at major airports while offering a flying experience unique from major carriers. But with slots at major airports tightly held, JetBlue has found limited expansion opportunities in the northeast.

The talk of a JetBlue merger rose to prominence shortly after the Department of Justice filed its lawsuit to block the US Airways/AMR merger in August of this year. A merger between US Airways and JetBlue was occasionally discussed among analysts as an alternative if the US Airways/AMR merger was unsuccessful.

But a settlement was reached in the US Airways/AMR merger and the process of building the world's largest airline was given the go ahead. JetBlue actually turned out to be a big winner from the settlement as the DOJ got the merging airlines to divest some highly valued slots to discount airlines such as Southwest Airlines and JetBlue.

Although JetBlue is a smaller carrier and the acquisition of it would be a significantly smaller merger than the US Airways/AMR merger, a JetBlue acquisition would be expected to come under strict antitrust scrutiny. One of the ways the DOJ has sought to maintain competition after the US Airways/AMR merger is by having American Airlines Group give up some slots to carriers like JetBlue. If the DOJ then allowed a major carrier to acquire JetBlue, it would defeat the whole purpose of the slot divestments.

Most likely a merger involving JetBlue would not involve American Airlines, United Continental, or Delta Air Lines. Instead, if such a merger were to happen, a smaller airline would have to merger with JetBlue.

The DOJ may allow a merger between JetBlue and Alaska Airlines, a subsidiary of Alaska Air Group (NYSE: ALK), as such a merger would have limited overlap and would provide a stronger airline to compete with the largest carriers. The combined network of JetBlue and Alaska Airlines would have a much greater nationwide presence combining JetBlue's strong east coast network with Alaska's strong west coast network. Challenges would remain in integrating smaller airlines that have a distinctive brand image developed over time, but if the two carriers did see an advantage in combining, they could always choose to keep two brand names but operate as one airline.

End of mergers?
The airline industry has just undergone the greatest wave of consolidation in its history. Over the next few years, we will see the full integration of American Airlines Group, the finishing touches on the United Continental merger, and the responses by all airlines to the new industry environment.

While the largest airline mergers look to be at an end, mergers and acquisitions of smaller airlines could still happen under the right conditions. Investors should not pick an airline purely because of merger potential but smaller merger possibilities are something to keep in mind now that the largest mergers are finished.

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Alexander MacLennan owns shares of and has options on American Airlines Group and Delta Air Lines. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. 

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