Global competition, 2008 election may intensify airline merger talk

Analyst C. Leonard Bauer, formerly of Prudential, told BloggingStocks on Friday that mergers would enhance the sector's economies of scale, reduce redundancies and waste, and ultimately lead to stronger carriers.

"Where there is an appropriate fit, the merged companies will come out of the deal with lower administrative costs per seat mile, increased buying power, an enhanced negotiating stance versus suppliers, and the elimination of money-losing flight routes and hubs," Bauer said. "The largest savings would come from reduced administrative and back-system expenses."

2008 election a factor, too

Any potential airline merger would be subject to federal antitrust and national security reviews, Bauer said. However, Bauer said three factors are "providing 'reality check' incentives for carriers to come up soon with merger plans that make sense: oil, international competition, and the 2008 election."

Oil's high price is increasing airlines' operating costs, "so it makes sense to add revenue per mile by sustainable means, and mergers are one way," Bauer said. The U.S./EU Open Skies agreement will add more international competitors to the U.S. air travel market in March 2008, and the U.S. election "may produce a Democratic Party-led White House and a Democratic Party-led Congress" which may seek to change the rules regarding airline mergers, or mergers in general.

"So if I were a big air [major airline], I'd do everything within my power to see if I could find a way to strike a deal that makes sense, soon, with another attractive competitor," Bauer said.