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.

Check out my other posts for BloggingStocks here.
Be sure to read You don't have to be 007 to find the best picks for 2007!

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.