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Another High-Flying Courtship?

Tim Beyers
November 27, 2006

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 (