United, US Airways deal shelved

May 30, 2008 8:06:09 AM PDT
The CEOs of United Airlines and US Airways formally shelved their effort to create the world's largest airline, backing away from a deal that could have shored up their finances but also would have resulted in fewer routes and higher ticket prices for consumers. The two chief executives confirmed the talks had been suspended in messages to their employees on Friday, a day after a meeting of United's Glenn Tilton and US Airways' Doug Parker at which United disclosed its decision not to pursue consolidation.

Chicago-based United, a unit of UAL Corp., and Tempe, Ariz.-based US Airways Group Inc. have been exploring a combination for more than two months - an effort that intensified in April after Delta Air Lines Inc. and Northwest Airlines Corp. agreed to pair up.

But the attempt was shadowed by the tightening financial outlook for all airlines, which has dried up cash and made them less attractive for the banks that would have to provide capital, as well as by the likelihood of labor turbulence and difficulties integrating the operations.

Pairing United with US Airways - the No. 2 and No. 7 U.S. airlines by traffic - would have formed a powerful carrier with potentially the most extensive U.S. and international route networks. It would have been bigger than Delta-Northwest by traffic, leapfrogging current No. 1, AMR Corp.'s American Airlines, as well.

But the deal would have all but certainly entailed significant cuts where the two airlines' operations overlap, including the Washington, D.C., area and parts of the West. There was also the chance of higher fares at a time when ticket prices are already climbing steeply.

"The more competition we have and the more pricing decisions by CEOs we have, the better for consumers," said Tom Parsons, chief executive of travel Web site Bestfares.com. "It's still coming down to the bottom line, though: Can any one of these airlines survive in this era? These airlines are going to have a hard time surviving."

In their communiques to employees, both CEOs cited oil prices hovering around $130 a barrel that make it increasingly difficult for airlines to be profitable.

"After a considered review by our board of directors, United has determined that it will not be pursuing a merger at this time due to issues that could significantly dilute benefits from a transaction," Tilton said. "We are evaluating other options, and will do what is right for United."

He said United management "will take the additional steps to size the business appropriately, leverage our capacity discipline to pass on commodity costs to customers and accelerate development of new revenue sources."

United separately has been pursuing the possibility of an alliance, in which two airlines would work together in many ways but not merge their operations. Houston-based Continental Airlines Inc. recently rejected United's attempt at a combination but left the door open for an alliance, which could enable them to set pricing and schedules and increase revenue without the integration problems and antitrust scrutiny that come with formal consolidation.

United is currently engaged in alliance talks with Continental, according to a source familiar with the discussions. The source, who requested anonymity because of not being authorized to speak by the carriers, said Continental's separate talks with American Airlines parent AMR Corp. appear to be dormant.

Parker told his employees that he strongly believes consolidation is required in the airline industry and that US Airways would benefit from participating.

However, he said: "After much work and many conversations with other airlines, we have come to the conclusion that consolidation involving US Airways will not occur at this time." He said it is "simply unlikely that anything will happen in 2008 as our industry continues to struggle with how to function in a world with $130-a-barrel oil prices."

UAL shares rose 10 cents to $8.49 in morning trading, while US Airways shares shed 18 cents, or 4.1 percent, at $4.14.

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On the Net:

www.united.com

www.usairways.com


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