United Airlines calls off merger talks with US Airways, looking at Continental alliance

31 May 2008

Just when there was a chance of the largest airline coming to fruition, even surpassing the mammoth Northwest-Delta combine, news comes that the CEOs of the two parties concerned, namely Chicago-based United Airlines and Tempe-based US Airways, have formally ended merger negotiations.

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.

This was the second attempt at combining the operations of the No.2 and No.7 American airlines by traffic, after a similar effort in 2001 had been rebuffed by antitrust regulators. However, the current effort assumed additional significance after Delta Airlines and Northwest Airlines agreed to pair up to create the largest airline in the world.(See: The Delta - Northwest merger)

However, 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 labour turbulence and difficulties integrating the operations.

Unlike Delta and Northwest who had little overlap by way of routes, the two protagonists in this drama had a lot in common in terms of areas serviced, especially in the Washington DC area and the western part of the US. Therefore, a merger would have entailed significant operational cuts and a very distinct possibility of higher fares at a time when prices have already increased significantly, leading to lower volumes.

Additionally, labor contracts at Tempe, Arizona-based US Airways call for increasing some wages in a change of control, eroding potential savings from a merger.