Source: NY Times
Authors: Micheline Maynard and Andrew Ross Sorkin

Talks between United Airlines and US Airways appear to have fallen apart, marking the second time in a month that United failed to reach a deal with a rival airline and putting the future of industry consolidation in question, people with knowledge of the discussions said Tuesday night.

United’s board, and its chief executive, Glenn F. Tilton, raised questions about the arrangement in the past few days, according to three people who were briefed on the decision making but spoke on condition of anonymity.

There has been little to no contact between United Airlines and US Airways in recent days and the internal teams of senior executives at both companies, as well as external bankers and lawyers assigned to the project, have put it on “permanent hold,” one person involved in the talks said. While it remained possible the talks could be revived, people involved in the most recent discussions said they had never advanced to final negotiations.

“We don’t comment on rumors or speculation,” said a United spokeswoman, Jean Medina. A US Airways spokesman, Philip Gee, also said his airline would not comment.

The talks between United, the second-largest traditional carrier behind American Airlines, and US Airways, the sixth-largest carrier, did not make enough progress for the two sides to reach an agreement in time for a deal to win approval from the Bush administration.

That would have needed to occur by about Memorial Day to allow time for regulatory scrutiny.

Word that United was balking on the deal came as something of a surprise to officials at US Airways, who had been waiting for an answer from the airline on the latest merger proposal, a person with direct knowledge of the situation said Wednesday morning.

The two airlines had agreed on the basic premise of the deal, this person said, even though it faced a number of risks. Officials from United and US Airways had planned to meet Thursday to continue discussions, the person said. But US Airways officials were growing impatient, given the time that would be needed to win federal approval for the transaction, the person added.

Shares of United rose 6 cents this morning to $8.24. US Airways stock was down 9 cents to $4.35.

Industry analysts had predicted that soaring prices for jet fuel would push airlines into each others’ arms. But so far, there has been just one big merger, the deal announced in April between Delta Air Lines and Northwest Airlines, and there have not been serious discussions between other airlines beyond talk of marketing alliances.

“Mergers in and of themselves are not the answer. Look around the world — airlines are making money, in Europe, Asia and Latin America,” said Mo Garfinkle, a veteran airline industry consultant. “There’s a more fundamental problem here. We need to cut capacity” meaning both aging aircraft and flights, Mr. Garfinkle said.

The United-US Airways talks, which had been under way at a more-casual pace for months, revived in earnest at the end of April, after Continental Airlines decided not to pursue a deal with United. Continental board members chose to withdraw from discussions on April 28, saying that it did not think an agreement was in Continental’s best interests.

At that time, people with knowledge of the discussions said United and US Airways sides hoped to reach an agreement within a month, so it could be considered by the Justice Department before a new president takes office.

One of the key sticking points to the deal appeared to be the complexity of putting together the various union contracts covering each airlines’ employees, these people said.

Sorting out which union would represent workers, as well as those workers’ seniority, could have taken months or even years, delaying the savings that might have resulted from the combination.

US Airways has still not reached agreements with all of its unions following its merger in 2005 with America West Airlines, while United’s pilots and flight attendants were adamantly opposed to a deal with US Airways.

Both Mr. Tilton and US Airways’ chief executive, J. Douglas Parker, frequently spoke out in favor of industry consolidation, saying it was needed to assure the long-term health of the industry, which has been pummeled by an 82.5 percent increase in prices for jet fuel over the last year.

Members of management at both airlines pushed for the discussions to continue, seeing a combination as the best way to ensure the competitive position of both carriers.

However, Mr. Tilton and United directors raised questions in recent days over the difficulty in putting such an agreement together, the people with knowledge of the situation said.

In particular, it became clear that the labor agreements would have to be sorted out before the combined airline could see any of the savings from the deal, which could have been in the hundreds of millions of dollars.

Although the United board met nearly two weeks ago for an update on the discussions, it took no formal vote on the situation, since there was no agreement to consider, these people said.

One factor that might have worked against a deal was United’s unexpected first quarter loss. In late April, United said it lost $537 million during the quarter, blaming sharply higher fuel prices. United, which cut thousands of jobs when it spent more than three years under bankruptcy protection earlier this decade, said it would cut flights and eliminate 1,000 more jobs.

United and US Airways reached a merger agreement in 2000, but the arrangement fell apart in 2001 after the Justice Department said it would oppose it on the grounds that it would be anticompetitive.

Analysts had raised questions about whether the agreement would be optimal for United. A combined United-US Airways would have had a multitude of hubs, including United’s operations in Chicago, Denver and at Washington Dulles International Airport, while US Airways has hubs in Las Vegas, Phoenix and extensive operations in the Washington area, including an east coast shuttle.

Further, United, which has one of the industry’s strongest route systems in the United States and across the Pacific, would have gotten little help internationally from US Airways, which has minimal overseas service.

Mr. Garfinkle said he believed investors would support future mergers involving United or other carriers, but the airlines needed to streamline their fleets and take other cost cutting moves before that happens. “There is capital out there, but not for old-fashioned mergers,” he said.