Nos. 2 and 4 European airlines Air France and KLM have announced a $913 million combination to form an airline surpassing current leader British Airways. It's no surprise that the announcement coincides with U.S.-European Union talks this week on liberalizing transatlantic air travel.

With Belgium's Sabena gone and Switzerland's Swissair dead and resurrected, the flag carriers of Greece, Portugal, and Spain fly low. Air France itself barely escaped the grave in the early 1990s and KLM groans under debt, while new competition threatens. U.S. flyers have long known discounts and no-frills operators from People's Express to Southwest (NYSE:LUV), JetBlue (NASDAQ:JBLU), but now the likes of RyanAir and EasyJet appear set for the long term to offer Europeans cheap fares, their way paved by Freddie Laker and others that tried in vain to overturn Europe's formerly protectionist skies.

On both sides of the Atlantic, airlines thread the needle by forming alliances, partnerships, code-share agreements, and the like -- anything but a real live merger to bring regulatory and antitrust retribution upon them. But the carriers used to be secure in the knowledge that, as a last resort, European governments would throw more money at them.

Today, the European Commission diminishes governments' power to prop up the national treasures or prevent deeper combinations. As in the U.S., antitrust and protectionism carry less weight when airlines prepare to crash, national budgets are strapped, and citizens want relief. And both Brussels and Washington know that in the long run, liberalizing flight rules is the only way for the industry to survive.

Top of the lists at the talks this week? Europe wants U.S. cabotage -- domestic flying rights -- and a cut or elimination of the 25% upper limit on foreign ownership of U.S. airline voting stock. The U.S. covets flying rights to all European cities, where landing slots and gates are today jealously guarded. For example, only reorganizing United Airlines and AMR's (NYSE:AMR) American Airlines can land at London's Heathrow. Europe wants to invade the U.S. but fears Yankee incursion itself.

What does it mean for U.S. airlines? KLM and Northwest Airlines (NASDAQ:NWAC) share flight codes, allowing frequent flyer program members to use miles on flights, say, from Minneapolis to St. Petersburg via Amsterdam. Northwest allies with Continental (NYSE:CAL), after regulators pooh-poohed a merger. Those two have joined Delta (NYSE:DAL). So, the Nos. 3, 4, and 5 U.S. carriers presumably all will join the SkyTeam alliance with KLM and Air France. Prices won't drop, but it will be more careful choreography in a delicate air dance.

This week and in the coming years, expect incremental progress and at some point U.S. permission for at least a few top domestic airlines to merge. While it may seem that fares to Europe cannot be any cheaper from October through March and more expensive the rest of the time, creaky regulators and robust competition will bring high season fare relief, too.

Join the debate on our Southwest and JetBlue discussion boards.