(Corrects reference in 7th paragraph to US Airways from Continental)

NEW YORK - UAL Corp's United Airlines is in merger talks with US Airways in a deal that could create the second-largest carrier in the United States, two sources familiar with the matter said.

The discussions, aimed at cutting costs and competing with a combined Delta-Northwest, have been going on for a few weeks, and could fizzle or lead to talks with other carriers, the sources said. The talks are not in advanced stages, they said.

This would not be the first time the two airlines have tried to merge: in 2000, they announced a $4.3 billion deal that fell apart on opposition from labor unions and the Department of Justice.

In 2008, sources had told Reuters that US Airways was in parallel talks with United and Continental Airlines Inc about a possible merger, when Delta Air Lines was merging with Northwest to create the world's largest airline.

The talks ended as United chose to pursue an alliance with Continental instead.

Airline industry consultant Michael Boyd said United's talks with US Airways might be intended to signal to Continental that they are ready to renew merger talks.

If you take a look at those two carriers, there's a tremendous amount of overlap, Boyd said, referring to United and US Airways. This is likely to get Continental, which would be a better fit, out of the barn to start talking.

US Airways shares surged 26 percent to $8.61 after the closing bell. United's stock jumped more than 8 percent to $20.51. Shares of other airlines also rose.

The New York Times first reported the news late on Wednesday, citing people familiar with the situation.


A deal between US Airways and United would create one of the world's largest airlines, but analysts are skeptical. The deal would lack support from the pilots union, a major force that has derailed mergers in the past.

Speaking at the Reuters Travel and Leisure Summit in February, Capt. John Prater, president of the Air Line Pilots Association union, suggested the union would back a merger between Continental and United, which he indicated made more sense than one between United and US Airways.

Representatives of the union were not immediately available for comment.

Antitrust issues will also likely come up again: the two carriers would end up with a large number of hubs and extensive operations in the Washington area.


Many airline executives have called for consolidation, saying it is a necessity for the industry to return to profitability.

The airline industry has lost $50 billion in the past 10 years, including $11 billion in 2009, according to the International Air Transport Association. The industry has been struggling with high fuel prices and a pullback in consumer spending amid a weak economy.

Both UAL and US Airways told Reuters separately in February they were open to a merger. Speaking at the Reuters Summit, UAL Chief Financial Officer Kathryn Mikells said: UAL has been supportive of consolidation for a long time. It is something we will continue to look at.

Speaking at the same summit, US Airways Chief Financial Officer Derek Kerr said: Consolidation is one of the major ways this industry can become profitable.

When asked why US Airways was not approaching another carrier, Kerr said at the time: It's difficult for the No. 5 player to make a move on No. 1 through 4.

The four largest U.S. carriers are Delta, American Airlines , United and Continental.

US Airways and Continental declined to comment.

UAL spokeswoman Jean Medina also declined to comment, but added: We've been consistent on our position on consolidation generally for several years, and that position is well known.

United Chief Executive Glenn Tilton and US Air CEO Doug Parker have both been vocal proponents of consolidation.

(Additional reporting by John Crawley and Kyle Peterson; Editing by Andre Grenon, Richard Chang, Gary Hill)