The terse one-line statement from British Airways that it is “exploring opportunities” with American Airlines and Continental is confirmation of just how worried the three are by rising oil prices.

AA and Continental announced huge first-quarter losses and BA is expected to reveal its second profit warning of the year next month as crude remains persistently high.

Airlines are going bankrupt on almost a daily basis and the big carriers are looking to cut other costs through mergers and takeovers - evident in Delta's tie-up with Northwest. A merger of BA, AA and Continental would provide plenty of scope for rationalisation while also dominating the transatlantic skies - which is one reason why it is unlikely to 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 deal is that US law prevents foreign ownership of domestic carriers. Even in its current weakened state, BA's £2.8 billion market capitalisation is much bigger than the two Americans combined (some £2.2 billion) 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.

BA would also need to secure antitrust immunity from the US authorities for the North Atlantic. It has been denied this in past talks with AA but the granting of approval to Air France-KLM and Delta-Northwest suggests it may be less of an obstacle this time round. Even so, Dresdner Kleinwort points out that a threeway deal would give the new entity nearly 45 per cent of the slots at Heathrow - implying it might have to give some up.

Should a merger be off the agenda, there are other ways the carriers can co-operate. They can learn from Air France and Delta, who have integrated their North Atlantic operations, and jointly buy fuel, food and other supplies, which would certainly help with cost reduction but again would face opposition from rivals. Continental, currently part of SkyTeam, could also join the oneworld alliance, of which BA and AA are founding members. This is the most likely outcome of the talks. But being able to move air miles between carriers is no cure for oil at $120 a barrel.

With some £5.7 billion of combined North Atlantic revenues and massive operational gearing, modest improvements in margins would have an pronounced effect on profitability - hence the merger's allure. As it is, at 243p, or 11 times next year's earnings, BA is best avoided for now.

National Express

There may be a world of difference between airlines and bus and train operators but that has not stopped National Express from feeling the wake from a downturn in air travel. In yesterday's first-quarter update, the FTSE 250 transport group says it has seen a “softening” of demand on its Stansted routes as a result of lower air passenger volumes.

That is the only weak spot in an otherwise solid statement. UK coach revenues were up 5 per cent, buses ahead 6 per cent and rail 9 per cent better, with the East Coast Main Line (taken on in December) especially buoyant. Trading in North American school buses remains steady, with no sign that US school boards are reining in spending. Perhaps most reassuring, given fears over the strength of its economy, National Express says trading in Spain - where it last year bolstered its Alsa operation with the £450 million purchase of Continental Auto - remains on track.

That did little to stir the shares, down by a quarter since the start of the year. Fuel prices are a persistent concern, but they account for only 5 per cent of operating costs. Further, the company is 85 per cent hedged for 2008 and 40 per cent for next year. With greater exposure to buses than any of its peers, National Express should also be more defensive. Unlike trains, there is considerable flexibility to drop services if demand falters. It also has much scope to benefit from any “modal shift” - the substitution of one form of transport for another - induced by oil prices.

Yet at 931p, or less than nine times next year's earnings, National Express remains the cheapest stock in its sector. That is odd given the company has pledged to raise its dividend, which currently provides a yield of 4.5 per cent, by 10 per cent in each of the next three years.

Tuck away for the long term.

Idox

First it was Northgate Information Solutions, then it was Civica. Last week, IBS OpenSystems said it had received a bid approach and yesterday it was the turn of Anite Group, which gained 28 per cent after confirming predatory interest. The upshot of this six-month flurry of consolidation is that Idox could soon be the only pure-play provider of local government software on the stock market. With a market capitalisation of £38 million, Idox is the smallest of that bunch, which may explain the oversight. The fact that Noble, its stockbroker, does not have a market-making operation has also hindered liquidity in its shares.

Idox's growth alone should make it attractive: orders are ahead of last year, margins are a healthy 14 per cent, earnings are forecast to increase 24 per cent. Last month it won a

£2.3 million contract to provide software to the Scottish Government. At 11p, or six times current-year earnings, Idox is worth a punt.

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