The Johnson School at Cornell University just held its capstone event for 1st year MBAs, an “Integrative Case Competition”. The case? Essentially, “What airline should Continental acquire and why?”. The case was set up from and investment banker’s perspective, pitching the deal to Continental. Given all the talk of consolidation within the airline industry the case was both relevant and timely, although I don’t think that many expect CAL to be the first to initiate a deal.

Before reading on, take a second to consider who you think would be the best acquisition target for CAL.

The winning case team pitched that CAL, NWA, and a European Private Equity firm partner up for a Joint Venture to establish a Special Purpose Acquisition Vehicle and acquire BMI. A highly improbable deal, to put it mildly, but certainly the most creative recommendation.

I believe the most popular pitch was that CAL acquire Alaska Airlines. Their homogeneous fleets of Boeings (increasingly dominated by 737-800s), complementary route structure, and similar reputations seemed to make the most sense from a long-term strategic point of view. Alaska Airlines would give CAL a west coast presence from which to further expand internationally.

The next most-pitched deal was a CAL-NWA merger. Few would argue this doesn’t make any sense from a “synergies” point of view, but I question if CAL is in a position to lead such a deal, or could come out a winner if Delta decided to join the bidding. I have similar doubts for CAL’s ability to acquire United or Delta, which were also pitched.

The best part of the competition was the quality of the judges panel, which included professionals from Citi, Northwest Airlines, AWAS, and McKinsey, among others. Several of the judges have been working in the airline industry for 20 years or more.

The MBA students got a crash course in the airline industry and quickly discovered its inherent difficulties from a management perspective. Unsteady cash flows, very high debt to equity ratios, heavy use of operating leases, regulatory constraints, and labor issues make it very difficult to place a value on an airline, and also limit the many of the strategic alternatives management has available. Like most industry watchers, I believe we’ll see some M&A activity within the industry within the next year or two. I am tempted to say that it is an exciting time for the airline industry, but then again, when isn’t it?