David Prosser: Airlines learn to love each other

Outlook Another day, another nail in the coffin of independent airlines. The hundreds of passengers who turned up at Gatwick yesterday hoping to board flights with the now defunct Sterling Airways hadn't even made it home again before news was breaking of Sir Michael Bishop's decision to sell his stake in BMI to Lufthansa.

Moreover, the success of Lufthansa in finally taking control of BMI may only be the first stage in the creation of a new European super-carrier. Sir Richard Branson's Virgin Atlantic has already expressed an interest in some sort of deal with Lufthansa. Sir Richard has long coveted BMI, but there is no reason for the German airline to sell, and a fully-fledged alliance between Virgin and Lufthansa is more likely.

The end-game in international airline consolidation is upon us. In the summer, it looked as if the soaring price of jet fuel would hasten mergers and alliances, but the global economic downturn now presents a more pressing threat to airline profitability. Indeed, last week the Association of European Airlines revealed figures showing that international air traffic fell in September, by 1.1 per cent compared with the same month last year, the worst such decline for 25 years.

An alliance between Virgin and Lufthansa would create a potent international competitor. The BMI acquisition already makes Lufthansa the second largest operator at Heathrow, behind British Airways, and a deal with Virgin would power a major expansion in its transatlantic business.

Such a tie-up would also pile the pressure on BA, which seems to be running into trouble on its own plans for consolidation. The expansion of its alliance with American Airlines is on hold, pending a decision fromcompetition authorities on the pair's application for anti-trust immunity (don't expect Virgin to stop campaigning against that alliance, by the way, even if it does do a deal with Lufthansa). And talks with Iberia, with which BA is supposed to merging, have also hit a tricky patch.

When the BA-Iberia tie-up was announced, it was viewed as a BA takeover despite being presented as a merger of equals. As it turns out, the Spanish airline believes that its financial strength actually entitles it to a much greater share of the combined business than had originally been envisaged. There is no certainty that agreement can be reached.