Delta delays Comair sale as it weighs strategic options

For years, sector analysts have argued that the U.S. airline sector needed two or three mergers to reduce the number of carriers, eliminate redundancy and create greater economies of scale and increased efficiency.

However, continued, solid leisure travel demand has led to fuller flights and modest pricing power for the airlines. Prior to the upturn, for all but a few flights, airlines rarely increased ticket prices beyond what was needed to cover higher fuel costs.

In the past two years, however, persistent travel demand has enabled some of the major carriers to boost prices, with United, American Airlines (NYSE: AMR) and Delta all recently announcing fare increases by up to $20 per flight.

Still, concerns about a possible slowdown in the U.S. economy in 2008, combined with uncertainties stemming from the volatile oil market -- one where an airline can incur substantial losses if the price of oil rises or if it hedges against an oil price rise that does not occur -- have prompted some analysts to continue to argue for mergers, in spite of the carriers' overall cash flow improvement.

Sector Analysis: The argument, from an efficiency standpoint, remains with mergers. Still, from an executive management attractiveness standpoint, the sector appears to be stuck in neutral, one where each carrier seeks to be the managing company in the deal. The emboldened management stance is typical among companies that sense their strengths have increased and / or will increase. Hence, it may indeed take softer conditions in the airline sector for deal talk to become more attractive to the potential parties involved.