Alliance Could Provide Merger Benefits, Without Merger Hassles

Continental Airlines is beginning to look like one of the smarter players in the airline consolidation frenzy. That airline's merger talks with United had many industry analysts scratching their heads, especially after United announced it lost over a half-billion dollars just in the first quarter.

Last weekend, Continental announced it broke off those talks, and would continue as an independent company. United reportedly plunged immediately into final talks for a merger with US Airways, which still has unfinished business from its last merger with America West three years ago.

Now, it looks as if Continental may have found a way to drink the milk without buying the cow. The Fort Worth Star Telegram reports American Airlines has confirmed that it's exploring opportunities for cooperating with Continental and British Airways, presumably in an alliance.

British Airways issued a brief statement Wednesday confirming the talks. "Further details will be announced when appropriate," the carrier said.

US law prohibits foreign airlines from merging with American or Continental... but a marketing coalition could let the three sell seats on each other's flights and coordinate awards programs, without combining workforces, resolving corporate culture clashes, and defending lawsuits from unhappy stockholders.

Analysts tell the paper if Continental was to join the OneWorld alliance -- which currently includes American and BA -- it would essentially allow the three to operate as a single carrier on flights across the Atlantic, an arrangement potentially worth hundreds of millions of dollars.

The airlines would have to be granted immunity from antitrust action before forming such a transatlantic alliance, a problem in the past, but the recent wave of quarterly losses and bankruptcies among US airlines, combined with the opening of London Heathrow to more competition under the Open Skies agreement, could make this the right time to try again.

As analyst and consultant Darryl Jenkins puts it, "If I was in American's place, I'd be at the Department of Justice at dawn every day arguing this case. They have a lot more leverage now."

FMI: www.continental.com, www.aa.com, www.britishairways.com