The statement from British Airways last night that it is "exploring opportunities" with American Airlines and Continental is confirmation of just how worried these carriers are by rising oil prices. AA and Continental announced huge first-quarter losses recently and BA is widely expected to reveal its second profit warning of the year next month as oil prices show no sign of dropping significantly in the near future.

Airlines are going bankrupt on almost a daily basis and the big carriers are looking to cut other costs through mergers and takeovers. A merger of BA, AA and Continental would create a massive airline with plenty of scope for cost-cutting while also dominating the transatlantic skies, which is one reason why it will not happen. Sir Richard Branson, president of Virgin Atlantic, has already fought two attempts by BA and AA to get together and he is ready to bring his considerable political and consumer influence against this latest proposal.

Another factor that stands in the way of a BA-AA-Continental merger is that US law prevents foreign ownership of domestic carriers. Even in its current weakened state BA's market capitalisation is much bigger than the two Americans put together and it would be the controlling shareholder. The laws banning foreigners are scheduled to change in 2010 under Open Skies rules but US politicians are unlikely to ratify rules that could threaten the heavily unionised domestic carriers and it would be unwise to bank on the changes taking place.

However, even if a merger is off the agenda there are other ways that the carriers can co-operate. They can learn from Air France and Delta, who have integrated their North Atlantic operations, and jointly bulk-buy fuel, food and other supplies, which would certainly help with cost reduction but again would face opposition from rivals.

Continental could also join the oneworld alliance, of which BA and AA are founding members. This is the most likely outcome of the talks and the one that would have the least impact. Being able to move air miles between carriers is no cure for oil at $120 a barrel. More radical solutions will be needed for the airline sector to fly through the next year without experiencing severe turbulence.

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