United backs out of talks with US Airways

United Airlines tabled talks to merge with rival US Airways, conceding the costs of integrating two complicated operations might have overwhelmed a carrier already reeling from record fuel prices, people familiar with the matter said.
The decision to back away from negotiations reflects concerns over how the carriers would finance the deal’s integration costs as fuel costs eat away at their cash reserves, and with United executives’ confidence that they would forge a marketing alliance with Continental Airlines, the people said.

Continental, which spurned United as a merger partner last month, has continued to discuss a potential partnership with its Chicago-based rival. The carrier has also held alliance discussions with American Airlines and British Airways, but views United’s route network as the better fit, the people said. And United’s labour contract with its pilots does not hinder the carrier’s ability to form closer ties with a domestic competitor, they said.

A merger with US Airways, nevertheless, would have helped the combined company shed unprofitable routes and excess costs. The airlines had targeted about $1.5 billion in synergies, a figure that would have exceeded the potential deal’s purchase price.
While the two airlines may revisit the potential deal at a later date, the window for reaching an agreement in time to receive a regulatory review before the Bush Administration leaves office is closing. Delta Air Lines’ agreement to merge with Northwest Airlines, once expected by industry executives and their advisers to trigger a wave of deals that consolidated the industry, may now be the year’s only deal between two legacy carriers.

Glenn Tilton, United’s chief executive, delivered his decision to his US Airways’ counterpart, Doug Parker, yesterday during a meeting in Chicago, and the carrier may announce its intention to remain independent later today, the people said.
United was also concerned with US Airways’ looming obligations to pay for new aircraft, and with elements of its labour contract that would have granted pilots a significant raise following the merger.
United has faced concern among investors that the fuel runup might test the carrier’s financial strength, and had already revised the terms of its credit facility with banks to waive a loan covenant.
A spokeswoman for US Airways did not return calls seeking comment; a United spokeswoman declined to comment.
Continental has said it would consider leaving its SkyTeam, where it is a junior member to US anchors Delta and Northwest, for another global alliance.
United’s board met on May 15 to hear presentations from management on its options, which include the US Airways merger and a Continental alliance, the people said.
Airline executives have argued that any merger or alliance requiring antitrust review would stand a better chance of approval before the next US president takes office.