United, US Airways again land in merger talks

An on-again off-again merger of United Airlines and US Airways seemed to be in the works again Wednesday as the two seek to forge a potent competitor in the ailing industry.

Although the deal may make financial sense for the two companies, aviation experts said consumers could see higher ticket prices in the months ahead.

“It’s the consumers that will pay for this,” said Michael DiGirolamo, aviation consultant and retired deputy executive director of the Los Angeles airport department. “If they merge, it’s likely that they’ll eliminate a number of seats and increase the price for those that are left.”

Reports of talks between UAL Corp., the Chicago-based parent company of United Airlines, and Tempe, Ariz.-based US Airways Group Inc. sent shares higher in after-hours trading, even as the airlines themselves declined to confirm that talks were underway.

But the talks may also draw in another potential United partner and spur opposition from the airlines’ labor groups.

Analysts and airline industry observers believe that United’s intent may be to lure Continental Airlines Inc. to the bargaining table. A combining of the two carriers, which are already joint venture partners, would form the world’s largest carrier with a global network reaching from South America to Asia and Europe, making it a potent competitor to current No. 1 Delta Air Lines Inc.

“This looks like an attempt to get something going,” said former Continental Chief Executive Gordon Bethune, who added that he has no direct knowledge of United’s plans. Representatives of Continental, United and US Airways declined to comment.

A Continental and United merger would create a company with a market value of about $5.8 billion and generate cost-savings and new revenue of about $2 billion, estimated Vaughn Cordle, a retired United pilot who is managing director of AirlineForecasts, a Virginia-based market research firm.

Combining United and far-smaller US Airways would have a market value of about $2.5 billion to $3 billion, AirlineForecasts estimated.

Negotiations between UAL and US Airways have been continuing for weeks and should be completed soon, according to a consultant who said he was involved in the discussions but asked not to be identified because he was not authorized to speak. “You should have a big story soon,” he said.

US Airways shares, which fell 26 cents to $6.82 in regular trading, soared to $8.27 in after-hours activity after rumors of deal talks surfaced. Shares of UAL jumped to $20.50 during after-hours trading after falling 52 cents to $18.95 in the regular session.

Wednesday’s reported merger talks were not the first for United and US Airways.

In 2000, the two airlines announced a $4.3-billion merger, only to withdraw from the deal amid antitrust concerns from the Justice Department and strong opposition from unions.

In 2008, United executives discussed merging with US Airways to save money amid rising fuel prices. But that plan fell apart because of tight credit markets and the airline’s declining financial outlook.

Around the same time, United Airlines also discussed a merger with Continental. But the talks collapsed, with Continental Chairman and Chief Executive Lawrence Kellner telling employees that the Houston-based airline would be better off alone.

Industry experts said a merger of United and US Airways could help bolster revenue for a struggling industry. U.S. passenger traffic has dropped 8.2% in the last two years, according to the U.S. Bureau of Transportation Statistics.

“During tough times like this, it’s normal for airlines to be talking to one another for possible consolidation,” said Tom Captain, principal and vice chairman of the aerospace and defense practice for auditing and consulting firm Deloitte. “There’s a chance it will pay off when the industry improves.”

William Swelbar, a research engineer at MIT’s International Center for Air Transportation, said a merger would allow the two companies to combine resources, cut overlapping operations and increase revenue.

Still, the biggest obstacle, industry experts agree, may be winning approval from the employee unions, particularly the pilots association.

The key sticking point may be clarifying such issues as seniority, which determines how pilots get assigned the most favorable routes, schedules and vacations slots, Swelbar said.

“It’s a huge hurdle,” he said. A merger of United and US Airways would make it the largest carrier at Los Angeles International Airport, surpassing AMR Corp.'s American Airlines, which served nearly 8.5 million passengers in 2009.