Source: Wall Street Journal
Author: Susan Carey

Plans to merge UAL Corp.'s United Airlines and US Airways Group Inc. were suspended -- for now -- when UAL Chief Executive Glenn Tilton told his counterpart, Doug Parker, Thursday that United is very near an alliance agreement with Continental Airlines Inc., said two people familiar with the situation.

United and US Airways had been in merger-exploration talks for more than two months. After stop-and-go discussions, Messrs. Tilton and Parker had lunch Thursday, these people said. During the meeting, Mr. Tilton raised concerns about the merger plan and said United thinks it is close reaching an alliance agreement with Continental, a plan that wouldn't require all the pain of upfront merger-integration costs and antitrust scrutiny by the U.S. Justice Department.

If United follows this path, it would confound a commonly held theory that the merger plan announced in April between Delta Air Lines Inc. and Northwest Airlines Corp. would lead to at least one follow-on merger by a pair of large carriers. But with fuel prices skyrocketing, credit increasingly tight and the economy slowing down, mergers are looking riskier than ever. And certain financial aspects of a UAL-US Airways deal related to labor contracts looked daunting.

UAL, which has been assessing its options after being rebuffed late last month by Continental for a full-blown merger, has continued to pursue a possible merger with US Airways while also looking at ways of luring Continental into an alliance with United and its Star Alliance global airline grouping, which includes anchor partner Deutsche Lufthansa AG.

Thursday, Mr. Tilton told Mr. Parker that a merger plan between UAL and US Airways is off the table for now, although he didn't rule it out in the future, the people familiar with the situation said. Mr. Tilton told Mr. Parker that UAL is "very close" to striking a deal with Continental on bringing the Houston-based airline into the Star Alliance and into a deeper relationship with United that potentially would be granted needed antitrust immunity by the U.S. Department of Transportation.

Continental, which a month ago rejected a merger with UAL, has been assessing its alliance options. Its current U.S. partners in the global SkyTeam airline-marketing alliance, Delta and Northwest, in mid-April announced plans to merge. That prompted Continental to look at its other options and participate in talks with AMR Corp.'s American Airlines, an anchor member in the oneworld alliance, and United, a founding member of Star.

United hopes to win U.S. antitrust immunity to allow it and Continental to act in a coordinated fashion -- as to fares, capacity and schedules -- in an indeterminate number of foreign markets. United already has asked the various Star Alliance member airlines around the world to allow Continental to join that club.

Because Continental is contractually tied to Northwest in the current SkyTeam arrangement, Continental wouldn't be able to exit those relationships until months after the Delta-Northwest merger closed, if regulators allow that to happen, said a person familiar with the situation.

Where this leaves US Airways is uncertain. The Tempe, Ariz., carrier, the nation's seventh-largest by traffic, has been a strong proponent of consolidation. It is the result of a 2005 merger of the old US Airways, which was in bankruptcy-court protection, and American West Airlines.

United, based in Chicago, is the nation's second-largest airline by traffic, after American Airlines.