UAL Corp’s United Airlines and US Airways Group Inc., both of which filed for bankruptcy last decade, are holding talks on a merger that would reshape the US industry, two people familiar with the matter said.
Discussions began in mid-February on the tie-up, which would help United steer travelers to international flights from US Airways’ domestic routes, said one of the people, who asked not to be identified because the negotiations are private. Spokesmen for the companies declined to comment.
Combining United and US Airways would create the second- largest US carrier and put pressure on AMR Corp’s American Airlines, now No 2, and Continental Airlines Inc, which held merger talks with UAL in 2008. Wider route networks boost revenue by allowing airlines to funnel in more passengers. British Airways Plc, Europe’s No 3 carrier, and Spain’s Iberia Lineas Aereas de Espana SA said today they signed a definitive agreement on a $7.5 billion merger.
“United and US Air are already in the Star Alliance, so that’s a hurdle that’s already been cleared,” said Hunter Keay, an analyst at Stifel Nicolaus & Co. in Baltimore. “Both of their top executives are the biggest proponents of consolidation in the industry. And they tried twice before to merge.”
Terms of a proposed merger haven’t been presented to the airlines’ unions, nor have the companies’ boards been asked to vote on a deal, one of the people said.
UAL ranks third in the US by traffic and market value, at $3.17 billion, based on data compiled by Bloomberg. US Airways is No 6 by traffic and No 8 by market value, at $1.1 billion. Delta Air Lines Inc. is the world’s biggest airline by traffic and leads domestic carriers in market value, at $11.1 billion.
UAL climbed $1.39, or 7.3 per cent, to $20.34 as of 7:41 am New York time on the Nasdaq Stock Market. Tempe, Arizona- based US Airways jumped $1.58, or 23 per cent, to $8.40.
Keay, the analyst, recommends buying Chicago-based UAL and doesn’t rate US Airways.
“We don’t comment on rumors or speculation,” said Jean Medina, a spokeswoman for United. “We’ve been consistent on our position on consolidation generally for several years, and that position is well known.”
James Olson, a US Airways spokesman, also declined to comment.
The new United-US Airways talks revive an effort that collapsed in 2008, less than two months after Delta Air Lines Inc agreed to acquire Northwest Airlines Corp. and spurred merger discussions across the industry. A bid by United to buy US Airways was scuttled in 2001 when US regulators objected.
“Is this possible? Yes,” said Jay Sorensen, president of airline consultant IdeaWorks in Shorewood, Wisconsin. “Would it be my first choice for marriage? No Unless one assumes that Continental said go away, never come back again. I guess maybe then you find a less attractive person to dance with.”
United Chief Executive Officer Glenn Tilton has championed mergers since before the carrier left more than three years in bankruptcy protection in February 2006. In 2005, US Airways CEO Doug Parker led a merger with America West Holdings Corp. after a bankruptcy and made a hostile bid for Delta in 2006.
Tilton said in a January 21 interview that global alliances are smoothing the path to mergers because they forge closer ties among carriers. He predicted a merger involving US airlines would happen in the next 12 to 24 months.
News of the talks came as a surprise, said James Ray, a spokesman for the US Airline Pilots Association, the union representing US Airways pilots. Parker has a previously scheduled meeting with the pilots today, Ray said. David Kelly, a spokesman for the United chapter of the Air Lines Pilots Association, didn’t return messages seeking a comment.
US Airways has some pilots working under a labor contract that includes change-of-control provisions that would boost expenses in a merger, so one option might be to make US Airways the acquiring company, said Robert W Mann, owner of consultant RW Mann & Co in Port Washington, New York.
“There are some real cost-oriented poison pills that, if they were triggered, would make it very unattractive,” Mann said.
US Airways is the more dependent of the two airlines on domestic flights. In 2008, the latest year available, 63 percent of UAL’s $20.2 billion in revenue came from the US and Canada, based on data compiled by Bloomberg. US Airways posted $10.5 billion in revenue last year, with 79 per cent from the US.
United operates US hubs in Chicago, Denver and San Francisco and at Washington’s Dulles airport, and has routes to Europe and Asia, including London’s Heathrow and Tokyo’s Narita airports. US Airways’ hubs are in Phoenix, Philadelphia and Charlotte, North Carolina.
The airlines belong to the Star Alliance, one of three such large global marketing groups that allow carriers to book passengers on each other’s flights.
United has 360 planes in its main fleet, according to a regulatory filing. It flies a mix of jets from Airbus SAS and Boeing Co US Airways has 347 aircraft in its main fleet, according to the carrier’s Web site. Narrow-body Airbus jets are the most-numerous plane type.
Sorensen, the consultant, said a United-Continental tie-up would make more sense, because of the carriers’ existing joint ventures, routes and hub locations. A spokeswoman, Julie King, declined to comment yesterday on United and US Airways, as did Billy Sanez, a spokesman for American.
Continental CEO Jeff Smisek said last month it was premature to make any decisions about consolidation while adding that the Houston-based carrier was poised to act “if we think it’s in our best interest to bulk up competitively.”
Continental held talks with Fort Worth, Texas-based American in 2008 while also in merger discussions with United, a person with knowledge of the matter said at the time. Continental abandoned the United talks that year.
Southwest Airlines Co, the biggest discounter, is the fifth-largest US carrier. It sought to acquire Frontier Airlines Inc last year out of bankruptcy court, only to lose to Republic Airways Holdings Inc.
Mergers can help build critical mass through combining networks while reducing costs through joint purchasing, sales and back-office operations.
British Airways and Iberia said today they reached a deal that should allow them to combine in “late 2010.” The carriers will retain separate brands and operations under a holding company called International Consolidated Airlines Group SA.
Air France became Europe’s biggest carrier in 2004 with the purchase of KLM, and last year the group bought a 25 per cent stake in Italy’s Alitalia. Deutsche Lufthansa AG, the region’s second-biggest airline, acquired Swiss International Air Lines AG in 2007 and has since bought BMI in the UK and Austrian Airlines AG and is adding Brussels Airlines NV.
