Ahead of the Bell: United and Delta

An official with knowledge of the talks said United, which is a unit of UAL Corp., and Delta have been discussing a combination. Both companies denied discussing a merger, but Delta on Wednesday said its board created a special committee to review strategic options for the airline.

The price of jet fuel, one of the biggest costs for an airline, has soared as the price of oil approaches $100 a barrel. Consolidation is a main way to cut costs.

Morgan Stanley analyst William Greene said he supports industry consolidation and said combinations that eliminate domestic overlap will yield the best returns for shareholders. Greene also said pressure is mounting to do a deal sooner than later.

"We believe that the economic arguments for merger and acquisition are compelling and that the drumbeat for consolidation will grow louder," Greene wrote in a client note.

Any deal announced will boost airline shares, said Greene, whose top picks are Delta, Northwest Airlines Corp. and US Airways Group Inc.

"We expect interest in the group to support shares but believe that it is unlikely we see significant appreciation until an actual deal is announced," Greene wrote.

Avondale Partners analyst Bob McAdoo said shares of all airlines should rise at least 25 percent if a merger is announced. McAdoo expects Northwest to perform the best, given interest in its Asian routes.

"We continue to believe that consolidation is in the best interest of the industry," McAdoo wrote.

Bear Stearns analyst Frank Boroch estimated over $1 billion in synergies, should the combination go through.

"The growing chorus of airline executives that support industry consolidation suggests industry merger and acquisition is more a matter of when, not if," Boroch wrote in a client note.