Airline stocks surged Monday as investors rejoiced at the latest decline in oil prices. Among the big gainers were UAL (UAUA), parent of United Airlines, which rose 17%, along with AMR (AMR), parent of American, up 12%, and Continental (CAL), up 9%. The rally came after Morgan Stanley analyst William Greene said the a decline in crude oil’s price to $115 from last month’s high at $147 “is a game-changing event” if it holds.

Despite the relief on the energy front, all isn’t well at United. Its pilots union called Monday for CEO Glenn Tilton to resign, saying that under his tenure United “has gone from being the finest airline in the world, with the best route structure and safety record, to a shell of its former self.”

The union notes that the airline ranked next to last in on-time arrivals and last in misplaced baggage in the latest U.S Department of Transportation survey. Meanwhile, the company’s shares have lost more than two-thirds of their value since United emerged from bankruptcy protection two-and-a-half years ago.

“This is not a personal attack on Glenn Tilton,” the union said in a statement. “These dismal numbers speak for themselves. They are a reflection of his inability to lead, his incompetence as a manager and his failure in virtually every category that can be measured.”

Update: United calls the union’s claims “an obvious and predictable attempt to deflect attention from ALPA’s illegal activity cited in our lawsuit, which details the organized and concerted effort to harm our customers, our employees and our performance.” United last month sued the union, claiming it organized a sick-out that forced the airline to cancel hundreds of flights, costing it millions of dollars in profits. United said Monday that the pilots’ campaign against Tilton “is part of the union’s ongoing two-year campaign to intimidate United into reopening a contract that runs through December 2009.”

Continental Airlines (CAL) is the latest airline to cut jobs and reduce its schedule to counter record fuel prices. The Houston-based carrier said Thursday it will reduce its domestic schedule by 16% in a bid to cut soaring fuel costs. Continental also will cut 3,000 jobs and ground 67 planes.  “The airline industry is in a crisis,” Continental said. “Its business model doesn’t work with the current price of fuel and the existing level of capacity in the marketplace. We need to make changes in response.”

The move comes on the heels of similar cutbacks at UAL’s (UAUA) United Airlines and the shutdown of several smaller carriers. Continental said that, at current prices and capacity levels, its fuel costs this year would be up $2.3 billion from last year - $50,000 per employee. Because of the pain inflicted by the job cuts, Continental says, CEO Larry Kellner and President Jeff Smisek will decline their salaries for the rest of the year.

There’s more jockeying for position in the airline industry. AMR’s (AMR) American Airlines and British Airways are discussing an expansion of their Oneworld alliance that would allow Continental Airlines (CAL) to join, British Airways said. American and British Airways also are talking about seeking antitrust immunity to set prices and schedules, Bloomberg reports, citing people familiar with the talks. A deal could involve a joint venture but wouldn’t call for a merger of AMR and Continental, which surprised UAL’s (UAL) United Airlines earlier this week by saying it intends to remain independent.

The discussions come as record crude oil prices pressure airlines to find ways to improve their financial standing. Delta (DAL) and Northwest (NWA) agreed last month to merge in a $3 billion deal, but their shares and those of other airlines have been in free-fall as crude oil prices march higher. Delta and Northwest took $10 billion in writedowns last week tied to the impact of high fuel prices, and top executives have been saying ticket prices will have to rise to allow the airlines to recoup some of their energy costs. An analyst tells Bloomberg that antitrust immunity for the American-British alliance would be “like a merger without the headaches,” but the news service notes that regulators haven’t signed off on similar requests in the past, citing the companies’ competitive advantage at London’s Heathrow airport.

The announcement that Delta (DAL) and Northwest (NWA) are finally getting on with their long-planned merger doesn’t exactly have airline investors doing cartwheels. Airline stocks were losing altitude Tuesday in a big way, with Delta down 13%, Northwest off 9% and UAL (UAUA) and Continental (CAL) - seen as potential partners in the next round of consolidation - each down 5%. Fortune’s Barney Gimbel points out that making a Delta-Northwest deal work is “certainly no slam-dunk,” as the new Delta will see its costs rise without any clear way of boosting revenue.

Meanwhile, the online travel agents are faring better, with Expedia (EXPE) and Orbitz (OWW) up modestly and Priceline (PCLN) down about 1%. This despite a note out this morning from Stifel Nicolaus saying the consoldation will hurt the online travel agents, or OTAs.

“Based on our analysis, we believe the Delta-Northwest merger and the airline closures will result in a one-time negative domestic revenue impact at the OTAs of 2% to 2.5%,” writes analyst George Askew, who rates the travel agencies hold. “Second, we believe demand for OTA services as a travel aggregator diminishes as airlines merge. We believe this impact is compounded as the airlines become increasingly web savvy and attract more users.” While that may indeed happen, right now savvy doesn’t seem like a good word to apply to the airlines in any context.

Can it get any worse for AMR’s (AMR) American Airlines? The Dallas-based carrier canceled 40% of its schedule Thursday and 25% of its schedule Friday after failing to meet Federal Aviation Administration airworthiness directives. To his credit, CEO Gerard Arpey took “full, personal responsibility for our being in this situation,” telling reporters at a press briefing Thursday that “our mechanics are absolutely not to blame.” The carrier hopes to have its entire fleet back in business Sunday.

In the meantime, lost flights are hitting AMR and its shareholders in the pocketbook. Arpey said Thursday that the cancellations’ cost will run “in the tens of millions of dollars,” the Dallas Morning News reports. As it happens, Arpey’s comment describes his pay as well, according to last year’s AMR proxy filing. Arpey made $10.2 million in cash and stock for 2006, the document reports - a year in which he certainly earned his pay, with the airline’s stock rising 36%.

But since then, AMR - and the rest of the industry - has been losing altitude fast. AMR stock lost 53% of its value last year, amid increasing competitive pressure and soaring energy costs, and has dropped an additional 30% so far in 2008, in part because of the maintenance mess. The past week has seen smaller rivals such as Aloha, ATA and Frontier (FRNT) stop flying or file for bankruptcy protection. When AMR makes its 2007 proxy filings in the next week or two, it will be interesting to see how the increasingly bumpy ride affects Arpey’s paycheck.

More maintenance problems in the airline industry. UAL’s (UAUA) United Airlines said Wednesday it may have to delay or cancel some flights after discovering it wasn’t in compliance with Federal Aviation Administration rules on its 52 Boeing (BA) 777 planes. “As part of a regular review of maintenance records, the company discovered that the functional test that checks the firing system on one of the five bottles in the cargo fire suppression system on the Boeing 777 was not performed, and this was voluntarily disclosed to the FAA,” United said. “United is in the process of checking this part of the system. This system is regularly tested as part of the pre-flight safety checks.”

The announcement comes in the wake of disclosures that bad wiring caused two United Airlines Airbus jets to skid off runways. It also comes just a week after AMR’s (AMR) American Airlines canceled more than a hundred flights to check wiring bundles, and just two weeks after Southwest (LUV) grounded 44 planes for missed maintenance checks. The rash of mishaps has Rep. James Oberstar of Minnesota questioning the FAA’s relationship with airlines’ management, the Washington Post reports, a day ahead of a scheduled hearing on the matter. “We need a change of attitude at the highest levels of the FAA,” he says.

Southwest Airlines (LUV) is trying to make amends. The Dallas-based carrier’s CEO, Gary Kelly, is apologizing for the company’s recent safety lapses. Earlier this week, Southwest grounded 44 planes for missed maintenance checks, forcing the cancellation of 126 flights. That fiasco came just a week after the Federal Aviation Administration said it would seek to impose a $10.2 million fine against Southwest for a case last year in which the airline continued to fly 46 planes after learning they hadn’t been submitting to timely mandatory safety inspections. Though U.S. Rep. James Oberstar called that episode “one of the worst safety violations” he has ever seen, Kelly told CNN last week that he thought the FAA’s proposed fine was “unfair” and “unprecedented.”

But this week’s maintenance mess seems to have changed Kelly’s mind. Southwest has long had the best safety record of the major carriers, but Kelly acknowledges in an interview with The Wall Street Journal that that reputation is in jeopardy if the carrier doesn’t act promptly. “I am not satisfied we are … as safe as we could be,” he tells the Journal. But the executive tells the Journal that Southwest wants to regain its best-in-class safety ranking and pledges to work with regulators. “There are some that have lost trust in Southwest Airlines,” Kelly says. “We will have to regain that trust.” Let’s hope for everyone’s sake that Southwest succeeds.

The merger of Delta (DAL) and Northwest (NWA) isn’t ready to push back from the gate just yet. The air carriers’ pilots unions haven’t reached an agreement on seniority arrangements for 12,000 pilots, the Associated Press reports, potentially imperiling the multibillion-dollar deal. The companies’ boards were ready to vote on the deal Wednesday, but now they must wait to see if an agreement can be reached that would clarify the pilots’ pecking order in the new company. An agreement by the pilots isn’t a prerequisite for the merger, but would smooth the way toward a quick integration, the AP reports.

Many other details of the Delta-Northwest linkup have been worked out, according to the AP: The combined carrier, which would surpass AMR’s (AMR) American Airlines as the nation’s largest by traffic, would be based in Atlanta, would be called Delta and wouldn’t lay off any front-line U.S. workers. The companies aim to slash costs and overcapacity by merging, and hope to get a deal under way soon to take advantage of the Bush administration’s pro-merger stance.

Not everyone is rooting for this deal to get done. Mark Hulbert, editor of an investment newsletter, writes at Marketwatch that the airlines have been a money-loser for investors — not to mention taxpayers. Hulbert points out that Delta would still be in bankruptcy if it weren’t for the government’s willingness to assume its pension obligations. “That means that, depending on how the combined company performs, we all could end up paying for this deal,” he writes. Maybe this isn’t such a good arrangement after all.

Airline stocks sold off Thursday even as the industry appeared to inch closer to a possible merger wave. UAL’s (UAUA) United Airlines is “in advanced negotiations with Continental Airlines (CAL),” the Chicago Tribune reported, citing a person close to the airlines. The Tribune reports that United “is poised to quickly seal the deal” if Delta (DAL) moves forward with a purchase of Northwest (NWA), though the paper adds that United might go after Delta if the Northwest deal fails to win approval with the airlines’ unions. Bloomberg reported earlier this week that union leaders are reviewing the Delta-Northwest matchup.

The airlines want to merge so they can cut expenses and reduce capacity to boost prices and counter the persistent rise of fuel costs. Thursday’s earnings report from Air France-KLM reminded Wall Street that expensive oil cuts into profits. Execs also would like to get their deals done quickly to take advantage of the merger-friendly Bush administration before it leaves Washington in January. Thursday afternoon brought a reminder that a new administration might not look as kindly on the consolidation craze, in the form of a statement from the presidential campaign of Sen. Hillary Clinton.

“If carriers decide to combine in order to cut costs and increase their market clout, we will have to take a hard look at the potential effects on workers and consumers,” the campaign said in a statement. “It is important that we preserve choice and competitive pricing in the airline industry. It is also vitally important that any proposed merger preserve the jobs and worker protections on which thousands of families rely.” Needless to say, that’s not exactly music to merger-obsessed airline investors’ ears.

Has merger time finally arrived in the airline industry? Delta (DAL) and Northwest (NWA) are closing in on a deal that would create the biggest U.S. air carrier, Bloomberg reports, citing two people familiar with the matter. The report says union leaders are studying the combination, which could be announced within weeks and would vault the combined company past AMR’s (AMR) American Airlines into the No. 1 slot. The merger would match two carriers that emerged just last year from Chapter 11 bankruptcy, though Delta and Northwest are hardly unusual in that regard. Two other big airlines that have reportedly been in the early stages of discussing a merger are UAL’s (UAL) United and Continental (CAL), both of which have been through bankruptcy court as well (though Continental, which has avoided the post-2001 swoon of many of its peers, hasn’t been in Chapter 11 for more than a decade). The industry is marching toward consolidation as the deal-friendly Bush administration serves out its last year in office, and as a rise in oil prices makes scale more essential for big carriers. The big question, assuming the companies can get union support for the deals, is how much ticket prices might rise.