United, US Airways chiefs in merger talks, people say
The chief executive officers of UAL Corp.'s United Airlines and US Airways Group Inc. met to work through details of a possible merger as rising fuel prices add to pressure for a tie-up, people familiar with the talks said.
United's Glenn Tilton and US Airways' Doug Parker focused on labor, financing, seating-capacity cuts and other issues that have slowed work on a combination, said the people, who asked not to be named because today's meeting was private.
The face-to-face session came more than two months after the talks began. A 20 percent surge in jet fuel in May is eroding profits and spurred American Airlines' announcement last week of the industry's biggest service reductions.
"The United guys have more options," said Robert Mann of consulting firm R.W. Mann & Co. in Port Washington, New York. "US Airways has far fewer options simply because they are a much smaller player. The onus clearly is on Parker to explain why it is that they ought to be the partner."
Besides a merger, United also is considering staying independent as well as seeking an alliance with Continental Airlines Inc. that would include authority to set pricing and schedules, people familiar with the matter have said.
Jean Medina, a spokeswoman for Chicago-based United, and US Airways spokeswoman Andrea Rader didn't return calls seeking comment on the talks between Tilton, 60, and Parker, 47. United is the second-largest U.S. carrier by passenger traffic, while Tempe, Arizona-based US Airways is No. 7.
Issues still unresolved in the United-US Airways talks include how to mesh unions, the people said. Pilots and flight attendants at both airlines have said they oppose a tie-up, and US Airways still hasn't negotiated unified contracts with those work groups after its 2005 merger with America West Holdings Corp. to exit bankruptcy.
Cost savings
United and US Airways agreed earlier that a combined carrier would be based in Chicago and would achieve about $1.5 billion in annual cost savings and added revenue, people familiar with the talks have said.
The Wall Street Journal reported the Tilton-Parker meeting yesterday.
U.S.-based carriers have been evaluating merger options since Delta Air Lines Inc. agreed April 14 to buy Northwest Airlines Corp. in a stock swap now valued at $2.13 billion.
Consecutive quarterly losses at both UAL and US Airways reflect the strain on the industry's finances. UAL's $537 million deficit was the biggest among U.S. airlines last quarter, while US Airways posted a $236 million loss.
Worst performers
They're also the worst performers this year among 14 carriers in the Bloomberg U.S. Airlines Index. UAL and US Airways have tumbled 77 percent and 71 percent, respectively, compared with a 35 percent plunge for the index.
UAL rose 48 cents, or 6.1 percent, to $8.39 at 4 p.m. New York time in Nasdaq Stock Market composite trading. US Airways rose 24 cents, or 5.9 percent, to $4.32 in New York Stock Exchange composite trading.
Other airline shares also advanced as the price of jet fuel for immediate delivery in New York Harbor slipped 3.4 percent, its largest one-day decline since March 19.
While both Tilton and Parker have championed consolidation to help pare industrywide seating capacity and boost fares, they also have been rebuffed in merger attempts. Parker's hostile bid for Delta was rejected in January 2007, and Delta spurned United as a partner and settled on Northwest.
A United-US Airways tie-up isn't likely to succeed either, said Julius Maldutis, president of consulting firm Aviation Dynamics Inc. in Bayside, New York. Objections from antitrust regulators, as occurred with a 2000 merger plan between United and US Airways, are only one of the challenges, he said.
"There are labor problems, there are management problems," Maldutis said in a Bloomberg Radio interview.
Reducing expenses
Both airlines have announced plans to trim seating capacity to lower operating expenses, with United saying last month it would cut its flying by 9 percent by year's end. US Airways announced a 4 percent reduction; American's cuts last week will pare domestic seating capacity by as much as 12 percent.
Should United decide to forgo a US Airways tie-up, a Continental alliance would provide most of the benefits of a merger while avoiding regulatory challenges and labor integration.
Continental rejected United as a possible merger partner on April 27, saying it wanted to remain independent. Houston-based Continental also is being wooed to join AMR Corp.'s American and British Airways Plc in the Oneworld airline alliance.
Credit-default swaps contracts on UAL debt jumped 82 basis points to 3,246 basis points today, according to CMA Datavision in London. The contracts, designed to protect bondholders against default, have more than doubled since UAL posted its first-quarter loss on April 22. A rise in price indicates a drop in the perception of a company's credit quality.