Less than a year after it emerged from Chapter 11 Bankruptcy, fending off a fierce bid by US Airways to buy it, Delta Air Lines is at the epicenter of speculation that United Airlines wants to merge with the carrier. Delta denies it is in talks with United, and UA discredits the reports.

Still, something’s simmering at Delta. No one’s denying that.

In response to correspondence from Pardus Capital Management LP that advocated airline industry consolidation, Delta CEO Richard Anderson said: “Delta believes that the right consolidation transaction could generate significant value for our shareholders and employees.” There is no mention in Anderson’s response as to how airline competition in this country might be affected.

Delta has formed a committee to analyze its “strategic options,” options that become more critical as the price of petroleum hovers between $90 and $100 per barrel.

The Associated Press first broke the story about a possible United/Delta merger, citing an unnamed source.

Should such a merger eventuate it would almost certainty touch off a cascade of similar combinations in the United States airline industry. Merge the number two (United) and number three (Delta) carriers, and competitors would be under severe pressure to find partners. Right now, there are just six so-called “legacy network” airlines remaining in the U.S.: American, United, Delta Air Lines, Continental, US Airways, and Northwest. United/Delta could force the remaining four to find partners – fast.

Another possible repercussion is that discount airlines such as Southwest, JetBlue, and AirTran Airways might have to scramble to get bigger to counter what could be three surviving U.S. legacy carriers.

Putting additional pressure on airlines to merge in 2008 is the possibility that should the Democrats ascend to the White House in early 2009, the Departments of Justice and Transportation might look less favorably on competition-cutting combinations.

Oil prices, political considerations, and soon-to-be-felt “Open Skies” agreement between the United States and the European Community (which opens up transatlantic air travel) could all play a role in what happens next.

Buckle up, folks. The forthcoming ride could prove fascinating.

© Cheapflights Ltd Jerry Chandler