Republic Airways Holding Inc. (NASDAQ: RJET) is going shopping. Only a day after making an offer for ailing Frontier Airlines (OTC: FRNTQ), it has made a bid to nab Midwest Airlines from private equity firm TPG Capital. The offer consists of $6 million in cash and a note for another $25 million. If the private equity house takes the deal, Republic will get 100% of Midwest's equity and TPG's secured note of $31 million.

The $25 million in debt is convertible to RJET stock at $10 a share, which gives TPG a bit more upside from the transaction. The seller would also have the right to nominate a member of the buyer's board of directors.

Of course, Republic's CEO, Bryan Bedford, is upbeat about the prospect of buying Midwest Airways, saying it will "enhance the strategic positioning" of his company. Like the proposed acquisition of Frontier, Midwest would continue to operate under its own name, though the target's Boeing 717s would be replaced with Embraer 190s.

Airline mergers no longer look like a panacea for the industry. They do not solve the problem of higher fuel costs. They often drive the ire of unions which do not want to lose any more jobs. And, integration problems usually make customers mad, which can send them off to fly other carriers.

Perhaps because of some of these factors, United (NASDAQ: UAUA) and US Air (NYSE: LLC) are cooling talks about a tie-up. Or, it may be that each airline thinks it can find a better deal. "Even as its talks with US Airways were continuing, United had begun talks with Continental for a possible alliance," Reuters reports.

The most likely case is that managements at airlines are looking for ways to stay out of Chapter 11. Rising jet fuel prices and the potential of lower passenger traffic in a recession have executives working overtime to keep losses from piling up.

A merger does no good if neither party in the marriage is in good enough shape to add much to the deal.

Douglas A. McIntyre is an editor at 247wallst.com and author of Ten Stocks Under $10 letter.

Eos was an improbably candidate for success in the airline industry. It flew one route, from New York's JFK to London. It was an all-business-class carrier.

Now, Eos is bankrupt. Having only one route, added to the rising price of jet fuel, cut the carrier down.

According to the AP, "The company, based in Purchase, N.Y., said it intended to eliminate most of its work force."

The news raises the question, once again, whether small and large airlines alike can make it though the current increase in fuel prices and a recession without having to file for Chapter 11. It was only four years ago that most U.S. carriers had to seek protection in the courts. AMR (NYSE: AMR) was one exception. That hurts it now because it did not use bankruptcy to cut its debt and the costs of its workforce. That may make it the most likely candidate of any American carrier to hit the air pocket of insolvency.

The oil price crisis my be so bad that, coupled with falling passenger revenue in a sharp and prolonged downturn, even mergers like the one planned by Delta (NYSE: DAL) and Northwest (NYSE: NWA) will not save them.

That will leave the banks, who hold most of the debt on airline balance sheets, holding the bag.

Douglas A. McIntyre is an editor at 247wallst.com.

The conventional wisdom is that labor unions in the US are close to dead and no longer have much influence on the managements of big companies. Tell that story to the boards at Northwest (NYSE: NWA) and Delta (NYSE: DAL). Disagreement at the pilot's union may undermine a merger between the two airlines.

According to The Associated Press ,"the pilots unions have agreed on a comprehensive joint contract, but they are unable to agree to how seniority for the 12,000 pilots would work under a combined carrier."

The dubious theory behind airline mergers is that putting two carriers together saves money, but concessions to labor to get a deal done may undermine that. It is also not clear that a newly combined airline can avoid the customer service problems early in the process. These troubles often drive customers away.

While the industry looks at a number of business combinations, pilots and other unions are pushing their agendas. The message is simple. If you want a merger, it is going to cost you.

Douglas A. McIntyre is an editor at 247wallst.com.

With the rumored Delta (NYSE: DAL) / Northwest (NYSE: NWA) merger hanging fire [subscription required], customers of both companies may well wonder what the impact will be on their hard-earned frequent flyer miles. The answer seems to be both good and bad.

The good side is that traditionally when airlines have merged, the frequent flier miles were carried over, allowing customers to select among an increased number of flights and destinations. There is no reason to believe this merger will be any different.

However, as travel guru Peter Greenberg cautions in his blog, airlines merge in part to take advantage of more efficient operations; i.e., fuller flights. Fuller flights mean a diminution of available seats for frequent flyers. He suggests, and I concur, that you not wait to redeem what you can.

I also suspect it's not a coincidence that United is going to start charging for a second checked bag, a trend I expect to quickly become the industry standard. Might airlines next allow customers to redeem frequent flyer miles to cover baggage costs in order to sop up frequent flyer miles at a bargain price??

In the airline industry, it seems that any deal will do. Northwest Airlines Corp. (NYSE: NWA) is already fairly far along in discussions about merging with Delta Air Lines Inc. (NYSE: DAL). Now UAL Corp.'s (NASDAQ: UAUA) United Airlines is talking with Continental Airlines Inc. (NYSE: CAL). But one set of negotiations in not enough for Continental. It is also talking to AMR Corp.'s (NYSE: AMR) American Airlines, according to The Wall Street Journal (subscription required). The paper reports "the talks were exploratory, and it isn't clear they will go further."

Airlines are seeking mergers under the premise that combining companies saves costs. While that is true to some extent, the marriages also hurt customer service -- badly. Putting together incompatible reservations and service operations can take years and be extremely complex, which can make it hell for consumers who just want to take an airplane ride from here to there. Bad customer service is a sure way to drive off fliers, and that is not good for revenue.

The savings in a merger also might not be as great as imagined. Fuel costs stay the same. The number of pilots and crews may drop some, but that can also cause labor disputes and strikes that interrupt service. The number of people needed to handle customer support and processing of reservations probably cannot be cut by much, especially if retaining revenue with unhappy fliers is important.

In an industry where mergers and Chapter 11 filings have been part of the landscape for decades, combining airlines may be no panacea. It is good to remember that the two most successful carriers in the United States, American and Southwest Airlines Corp. (NYSE: LUV) have never been much enamored of merging.

Douglas A. McIntyre is an editor at 247wallst.com.

With the news of impending M&A in the airline industry, based on my flight yesterday with Delta Air Lines Inc. (NYSE: DAL), the merger should be with Yellow Cab.

I was on a flight from JFK to Seattle, and the plane had finished boarding 10 minutes prior to takeoff when a flight attendant got on the PA system and thanked everyone for boarding so quickly but said they would have a delay anyway since the pilots had yet to arrive to the plane. Well to make a long story short we took off an hour late because the pilots, who were staying at a hotel in midtown Manhattan, weren't picked up by Delta transportation, and then when finally picked up they hit traffic and came really late.

Forget about merging with another carrier. How about buying a cab company so that you can get your pilot's to the plane on time?

Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. DISCLOSURE: Writer has no positions in any stock mentioned as of 2/8/08.

After airline stocks took a nearly unprecedented beating during the last few weeks on concerns about higher fuel costs and a falling economy, they rallied this week. Some of it may be that the selling was a bit overdone. But the biggest cause was news that Delta (NYSE: DAL) is considering a merger with Northwest (NYSE: NWA) or United (NASDAQ: UAUA).

According to Reuters, "most of the largest U.S. airlines are likely to post fourth-quarter losses, possibly signaling the end of an industry recovery that began in 2006 and further building a case for mergers."

Mergers in the airline industry are often used to keep one or the other carrier out of Chapter 11. The courts have been the refuge of the flying business for decades. If a carrier can't pay its bills, it goes into bankruptcy. When things get better, it comes out again. Creditors and unions usually get the short end.

The assumption that putting two big airlines together will save money is undoubtedly true. But compared to overall costs, those savings are probably very, very modest. Running Northwest costs about $12 billion a year. So much of that goes into fleet costs, fuel, and labor that there is not much to cut. Employees can be pushed out over time, but the unions are sensitive about it.

Earlier this month, rumors hit the market that United Airlines (NYSE: UAUA) and Delta Air Lines (NYSE: DAL) were considering a possible merger. Shortly afterward, Delta officially denied the rumors, but not surprisingly, United Airlines CEO Glen Tilton did not deny that they were considering merger options, as many industry analysts believe that United is the perfect company for a possible merger.

The airline, which took flight in 1930, filed for bankruptcy following the 2001 terrorist attacks and has appeared to be preparing for a sale ever since emerging from its bankruptcy proceedings. United came out of bankruptcy last year, but the company is still up to its eyeballs in debt, and boasts a miserable 2% profit margin over the past year.

When looking at United a couple of factors jump out at you pointing to the notion that the company feels a merger is the best avenue to explore:

The Associated Press reports that UAL Corporation (NYSE: UAUA)'s United Airlines and Delta Air Lines (NYSE: DAL) are in discussions about a merger. The firms would take United's Chicago headquarters and its name. One possible scenario involves Delta CEO Richard Anderson being the chief of the combined airline.

Why merge? Pardus Capital Management LP, a hedge fund, owns 7 million Delta shares and 5.6 million shares of United. Pardus pushed Delta to merge with UAL. It argued that it was "imperative" that the company merge with another airline in view of soaring fuel prices and what it described as the increased risks of going it alone. Pardus believes that "consolidation is needed to de-risk the industry, and time is of the essence as now is the right regulatory environment."

If Pardus is right, it seems to me that it must be forecasting that Hillary Clinton will be the next president. That's because Pardus believes that the regulatory environment for airline consolidation will deteriorate under the next president -- and I wouldn't be surprised if it thought mergers would be viewed more favorably under a Republican than a Democrat.

For years I have been wondering why there has not been an abundance of airline mergers. I have asked many people I thought wiser than I in the investment world and not received a satisfactory answer. Think about how many industries have seen rampant mergers and acquisitions in the last ten years alone: banking, communications, insurance, software, aerospace, brokerage, real estate, construction, energy, retailers, manufacturers and just about anything else you can think of.

It seems to me that Bank of America, AT&T, or Oracle have each independently been responsible for more M & A activity than the entire airline industry. Furthermore there are few industries that would benefit as much as airlines from a reduction in the number of carriers, overlap of service areas and greater efficiency. Why no M & A's I asked over and over with no adequate response...until Wednesday evening January 24, 2007 at about 8:15 PM, PST.

The light bulb came on at a lecture on business ethics by the renowned Rabbi Dr. Meir Tamari, an octogenarian economist visiting from Israel. According to his bio, he served the Bank of Israel for 30 years rising to the position of Chief Economist in the Office of the Governor and also served as a special consultant in the fields of risk evaluation, small firms and entrepreneurship for the British, Japanese, French and U.S Governments as well as the World Bank.

In the early part of the lecture he was discussing openness, forthrightness and disclosure in business for both private and public companies. This lead to important points about insider trading and why the United States had the best markets for investment. He followed with the issue of bankruptcy explaining the problem he had with someone being able to walk away from their obligations so easily.

He felt that if someone damaged someone else financially they should have an obligation to make amends for the rest of their life. He believed that management had plenty of early warnings and should take corrective actions, reducing risk as much as possible. As examples think about how Enron and Worldcom did the opposite, leveraging further and taking more risk instead of less. (my examples, not his.)

I have over simplified the discussion points that ensued but here is a portion of his reasoning. He claimed that quite some time ago he had theorized, and then proven to the World Bank, that bankruptcy is predictable five years in advance in the majority of cases. That there are factors in play that can be observed and that proper monitoring could reduce the risk of bankruptcy. Of course this position is not now unique and that is why we ask for so much information about business plans, cash flow, debt, management and the like prior to investing or major business transactions.

So with thoughts of insider trading and the predictability of bankruptcy in my mind the flash point came. The reason the airlines have not merged is extremely simple - THE AIRLINE BUSINESS IS A LOUSY BUSINESS!

Airline management has 'inside information' about every detail about the business and advance knowledge of most trends, an understanding of how capital intensive the business is, how regulated, how speculative and how competitive. There has not been any M & A activity because they know you would have to be nuts to buy an airline and they know it better than anyone else....they have inside information!

So now we are starting to hear about possible airline mergers -- why now? That is simple also and comes back to the Rabbi's discussion about bankruptcy. The airline business has not gotten any better. It is just that through bankruptcy, they can walk away from so many financial obligations without owing anything to their employees, shareholders and most creditors that in the short run it becomes a worthwhile investment.

In the long run I think all the things that haunt the industry will return so in the long run I think it is still a questionable investment for most of the investing public. If anyone knows why this will change I am all ears.

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Sheldon Liber is the CEO of a small private investment company and the vice president for design and research at an architecture & planning firm. Current architecture projects include work at military airports, general aviation airports and LAX.