(FORTUNE Magazine) – For all the devastation they've wrought on air travel, the terrorist attacks could ultimately grant the airlines their fondest wish: allowing weak carriers to merge with strong ones. Before Sept. 11, U.S. authorities feared, rightly, that fewer, bigger airlines would inhibit competition. Now the Bush Administration is quietly promising not just its blessing but also financial backing for combinations that once seemed unthinkable.

The fuel for mergers is the $10 billion in loan guarantees offered by the government. To its credit, a blue-ribbon board is poised to impose conditions on airlines seeking federal guarantees. The carriers would almost certainly have to wring concessions from unions and creditors. And they would likely have to give the government stock or warrants so Uncle Sam can profit from any recovery. "This is not money to keep them afloat until the economy turns up," says an Administration official.

But the board has a permissive streak that may undermine its good intentions. The Administration official tells FORTUNE that if a weak airline comes before the board proposing to merge with a stronger partner, the resulting company stands an excellent chance of getting loan guarantees, possibly without major concessions. The Administration's view is that mergers will result in stronger companies far more capable of repaying the federal loans. Airline CEOs, led by Delta's Leo Mullin, are pressing the government to orchestrate an industrywide consolidation: "In cases where some airlines don't pass muster," Mullin said recently, "the loan board should promote combinations of carriers."

But mergers among major airlines have major problems. They typically create labor strife by assembling two expensive, coddled work forces. "It's like tying two stones together to see if they'll float," says Jonathan Ornstein, CEO of Mesa Air. It's true that mergers could solve the airlines' financial difficulties--but only at the expense of consumers. A smaller, more cartelized industry would reduce competition, enabling airlines to charge higher prices, which they must do to keep paying pilots $200,000 a year and mechanics $60,000. If United buys ailing US Airways--a merger that had been nixed by the feds before Sept. 11--more than 30 routes that now have two or three carriers would have just one or two. "If I'm a United customer in Chicago, I can get big discounts in Chicago by giving United business on the East Coast that I used to give to US Airways," says Kevin Mitchell, who represents corporate travel managers. "If United buys US Airways, those Chicago discounts could drop from 10% to 3%."

The Administration responds by saying that if prices soar, a Southwest or a JetBlue or a new discounter will invade the giants' turf and undercut their fares. But the government should not be in the business of encouraging airline mergers, especially combinations that only prolong the industry's problems. Let the threat of failure force the carriers and their unions to finally tackle bloated labor costs. "The closer you get to death's door, the better your chances of getting concessions," says a top airline executive.

If the unions don't make concessions, some airlines will go bankrupt. Then the court will impose a restructuring plan. Without the escape route of mergers the industry will have to reform. It's about time.