Another dead end for United:
United and US Airways End Merger Talks
By MICHELINE MAYNARD
Published: May 31, 2008
US Airways and United Airlines told their employees on Friday that they would not reach a merger agreement with another airline for the time being, and said they were evaluating further steps.
The disclosures came in messages sent by W. Douglas Parker, the chief executive at US Airways, and Glenn F. Tilton, the chief executive at United. Mr. Tilton told Mr. Parker at a meeting in Chicago on Thursday that United had decided not to pursue a merger, ending talks that had been under way for weeks.
“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,” Mr. Parker said in his message to workers. “This is not to say that something won’t occur in the future — as you know I strongly believe that consolidation is required in our industry and that US Airways would benefit from participating.”
He went on, “Rather it is simply unlikely that anything will happen in 2008 as our industry continues to struggle with how to function in a world” with oil prices at $130 a barrel.
In his message, Mr. Tilton said the decision was reached after a review by United’s directors. The airline concluded that a merger was not the best step “due to issues that could significantly dilute benefits from a transaction.”
Shares of US Airway were down almost 7 percent in afternoon trading; United shares were less than one percent.
United is now expected to turn its attention to talks on a marketing alliance with Continental Airlines, but an agreement could take weeks or months to finalize, advisers to the airlines said.
For one thing, Continental has other options. It has held discussions with American, the industry’s biggest carrier, which in turn has spent years trying to win antitrust approval for its agreement with British Airways.
Continental already has a marketing agreement with Delta and Northwest, whose merger would create the country’s largest airline, ahead of American. Through that deal, Continental is part of SkyTeam, a global marketing alliance whose participants include KLM-Air France, the world’s biggest airline.
United is part of the Star Alliance, the largest marketing alliance among the airlines, whose members include Lufthansa, Scandinavian Air System, and Air China, as well as US Airways. Air India is expected to join the group next year.
Airlines have two goals in forming alliances: revenue growth and the ability to broaden their route networks, said Robert W. Mann Jr., an airline industry consultant in Port Washington, N.Y. In theory, they offer seamless route systems, and encourage passengers to choose an airline because of its partners.
“It’s easier said than done,” Mr. Mann said Friday morning. “Alliances create expectations that are rarely met.”
But any deals, even alliances, may be less likely given the challenges the airlines face. In his memo to employees, Mr. Parker said US Airways was prepared to deal with high fuel prices and had more cash than many of its competitors. “We like all airlines will need to adapt our plans and business models.”
He said the airline was working on several initiatives that it planned to announce soon. On Wednesday, US Airways said it would discontinue offering peanuts and pretzels to passengers on board its domestic flights starting this weekend.
Mr. Tilton also told his employees that the airline, which has announced plans to ground 30 aircraft, would announce additional steps soon.
United’s decision not to pursue the merger marks the second time in a month that it has failed to reach a deal with another major airline, only this time it was the company that spurned the idea. The board of Continental decided on April 27 not to continue discussions with United, saying that a deal was not in the airline’s best interest. .
Airlines have been hit this year by increases in the price of jet fuel, which has risen 82.5 percent in 12 months. Several carriers have announced plans to eliminate routes and retire aircraft to cut costs and to raise fares.
United, which spent three years under bankruptcy protection in this decade, lost $537 million in the first quarter, and said it would announce a series of cost-cutting steps. Some analysts thought the moves might be announced this week, but a spokeswoman for United, Jean Medina, said no announcement was planned.
United’s board raised concerns about the potential merger during a meeting on May 15. In addition, the airline faced the likelihood that at least two directors, representing the Air Line Pilots Association and the International Association of Machinists and Aerospace Workers, would vote against the merger.
Without unanimous board support, it might have been difficult for the airline to find lenders who were willing to back the deal, people with direct knowledge of the situation said Thursday.
Those unions, as well as the Association of Flight Attendants, might have also lobbied against the agreement in Washington.
However, United executives did not consider labor’s opposition to be insurmountable, these people said.
The breakdown of the United-US Airways talks means that Delta and Northwest will probably be the only major airlines that merge before the end of the Bush administration. The two carriers announced an agreement on April 14 that is being reviewed by the Justice Department. Delta and Northwest say they hope to receive regulatory approval before the end of 2008.
This week bankers, lawyers and other advisers to United, the second-largest traditional airline behind American, and US Airways, the sixth-largest, said the work on the merger had been postponed while Mr. Tilton pondered whether the negotiations should continue.
The delay frustrated some executives at US Airways, who were eager to proceed with discussions so that the agreement might be reviewed before a new president takes office.
Both airlines had agreed that there could be value in the combination, but never completed the details, like the location of the airline’s headquarters, which executive would run it and the compensation that shareholders would receive.
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