American Airlines in talks with Continental, US Air

Business Materials 26 April 2008 03:54 (UTC +04:00)

American Airlines has had early-stage merger talks with US Airways and is in advanced talks for an alliance with Continental Airlines, sources briefed on the situation said on Friday, Reuters reported.

American Airlines' talks with Continental are focused on forming an alliance that could share passengers, much like the SkyTeam partnership that includes Air France-KLM, Alitalia, Czech Airlines, Delta Air Lines, and Northwest Airlines, the people said.

But Continental is also in advanced talks with United Airlines for a full merger, the sources said. Continental will not pursue both options but rather, end up choosing either the merger or the alliance, sources said.

Meanwhile, United Airlines is also in serious merger talks with US Airways, and will choose to merge with either Continental or US Airways soon, the people said.

All of the airlines declined to comment.

The airlines would like to have any mergers approved under the current federal administration, which is considered more merger-friendly.

All talks have been ongoing since January this year, after people heard that talks between Delta and Northwest had became serious, the people said.

Earlier this month, Delta and Northwest announced a merger in an all-stock deal valued at just above $3 billion.

After racking up $35 billion in losses and finally emerging from a 5-year slump in 2006, U.S. airlines are hoping mergers could give them greater market power to reduce flights and raise fares.

The airlines also face a renewed sense of urgency to consolidate and cut costs amid skyrocketing fuel prices, a weak economy and a growing competitive threat from European carriers as trade barriers fall on trans-Atlantic travel. Jet fuel prices have more than doubled since the start of last year.

Continental, which has said it would prefer to remain independent unless the competitive landscape changes, had laid most of the groundwork for a merger with United even before Delta and Northwest publicly announced their deal, according to the sources.

Under the terms being negotiated, Continental Chief Executive would be CEO of the combined airline and UAL CEO Glenn Tilton could be chairman, the people said. Other details are still being negotiated in what would be another all-stock deal.

Combining United with Continental would create a company with a combined $35 billion in revenue and nearly 100,000 employees, surpassing the Delta-Northwest combination as the world's largest airline.

But that merger may not happen. United Airlines, whose shares plunged 40 percent when it reported a quarterly loss earlier this week, is also talking to US Airways.

Analysts have said a merger between those two carriers would be less complex than one between United and Continental Airlines.

JP Morgan analyst Jamie Baker earlier this week said a deal between United and US Airways could be easier when it comes to aligning the wages of pilots, combining fleets and reducing flights and seats.

Baker also said the merger would be easier because United and US Airways already have code-share agreements and are part of the Star Alliance.