Continental’s management ended months of speculation by announcing that a merger with troubled United would do more harm than good, even with the intense pressure airlines are under due to record high oil prices and the competitive threat posed by the recent deal between Delta Air Lines Inc. (DAL) and Northwest Airlines Corp. (NWA).

“The risks of a merger at this time outweigh the potential rewards,” Chief Executive Officer Larry Kellner said in a letter. “While some would prefer to see Continental pursue a merger, we strongly believe we have made the right decision.”

As for the niche carrier Eos, in grounding itself it joins Skybus Airlines, Aloha Airgroup Inc.’s Aloha Airlines and ATA Airlines Inc., which have already ceased operations, as well as U.S. charter operator Champion Airlines, which announced plans to stop flying at the end of May.

Frontier Airlines Holdings Inc. (FRNT) also has filed for bankruptcy protection, but at this time plans to keep flying.

The Eos downfall was “no surprise,” Calyon Securities airline analyst Ray Neidl told The Associated Press. “We saw it happen with other smaller, undercapitalized airlines. Basically, there are too many airlines. We’re in a period of consolidation. The weaker guys, [facing] $120-a-barrel oil, are finally succumbing.”

With jet fuel the single largest expense for carriers, merging to capitalize on economies of scale makes sense. And as the world’s new largest carrier, the Delta/Northwest merger now has the competitive advantage.

But while Continental still might be able to go it alone – even against a stronger potential rival – United is in a much weaker financial position and needs a partner. The carrier wasted no time in turning its attentions to U.S. Airways Group Inc. (LCC).

“Consolidation is under way – ensuring you have the right partner is everything,” United Airlines Chief Executive Glenn Tilton said in a statement. “We will pursue all options to ensure a strong, sustainable future for our airline.”

While talks with U.S. Airways are not yet at the advanced stage United had reached with Continental, management is doing its best to accelerate discussions, hoping to finalize any deal before the end of the year – and before there’s a possible change in the political party in the White House.

When it comes to mega-mergers – and industry consolidations in which there might be a perceived decline in competition – the Bush administration is seen as being more of a proponent for deals that require Justice Department approval in order to proceed.

Analysts say that U.S. Airways and United could mesh well due to similar pay structures and complementary fleets. In addition, United and U.S. Airways are both members of the Star global marketing alliance.

Bigger is Better

Atlanta-based Delta announced it would buy the Eagan, Minn.-based Northwest for $3.63 billion, all in stock, creating a single carrier with a combined enterprise value of $17.7 billion.

Delta Chief Executive Richard Anderson will be chief executive officer of the combined company. Delta Chairman Daniel A. Carp will become chairman of the new Board of Directors.

The carriers decided to go ahead with a merger despite being their respective pilot’s unions being unable to come to agreement. Delta’s 7,000 pilots endorsed the deal by supporting a new labor agreement that includes an equity stake.

While Northwest’s 5,000 pilots will be asked to join a contract before the deal closes, the union is expected to oppose deal after the unions could not agree on how to assign pilot seniority – a key determinant of shifts, pay scale and what airplanes they fly – in the new organization.

It is expected that the Delta/Northwest merger will be approved later this year.

The Atlanta-based Delta bought Northwest for $3.63 billion, all in stock, creating a single carrier with a combined enterprise value of $17.7 billion. The landmark deal is expected to ignite an industry consolidation wave, as small or struggling airlines go for size in order to compete with Delta’s newfound market heft at time when a slowing economy and soaring fuel costs are eviscerating profit margins for marginal players.

“Expect [the] dominoes to fall,” Bear Stearns Cos. Inc. (BSC) analyst Frank Boroch wrote in a note to investors.

Four smaller U.S. airlines have filed for bankruptcy in the past month – Frontier Airlines Holdings Inc. (FRNT), Skybus Airlines, Aloha Airgroup, Inc. and ATA Airlines Inc.

And now that the first major hurdle of Delta’s Northwest acquisition has been cleared, talks between UAL Corp.’s (UAUA) United Airlines and Continental Airlines Inc. (CAL) will elevate in priority.

Since 2001, U.S. carriers have shed more than 150,000 jobs and lost more than $29 billion.

Looking ahead, a report from Calyon Securities predicted the U.S. airline industry would lose more than $1 billion in 2008, mostly from the one-two combo of high fuel costs and shrinking demand, Reuters reported. However, top carriers Delta and Southwest Airlines Co. (LUV) are best positioned to weather the storm, Calyon analyst Ray Neidl said.

The new Delta is expected to generate more than $1 billion annually in revenue, even as it streamlines operations and trims overhead. And its balance sheet will have an expected liquidity of about $7 billion at the close of the deal.

“Today, we’re announcing a transaction that is about addition, not subtraction,” Richard Anderson, Delta’s Chief Executive Officer, said in a statement.

What’s In Store for Investors

Under the transaction’s terms, Northwest shareholders will receive 1.25 Delta shares for each Northwest share they own – a 16.8% premium based on April 14 closing prices.

The merger is subject to the approval of Delta and Northwest shareholders, and must also pass muster with regulators. It is expected that the regulatory review period will be completed later this year.

Board Members, Pilots Shuffled

Delta’s Anderson will be chief executive officer of the combined company. Delta Chairman Daniel A. Carp will become chairman of the new Board of Directors.

Northwest Chairman Roy Bostock will become vice chairman. Ed Bastian will be president and chief financial officer.

The board of directors will be made up of 13 members, seven of whom (including Anderson) will come from Delta’s board, and five of whom will come from Northwest’s board, including Bostock and Doug Steenland, the current Northwest CEO. One director will come from the Air Line Pilots Association (ALPA).

Delta’s 7,000 pilots sealed the agreement by supporting a new labor agreeing that includes an equity stake.

Northwest’s 5,000 pilots will be asked to join a contract before the deal closes, but Reuters reports that they will use “all resources available to aggressively oppose” the deal after the unions could not agree on how to work under one seniority umbrella, a key determinant of shifts, pay scale and what airplanes they fly.