United broaches alliance with US, Continental: sources

Continental restarted merger talks with United last week, two years after walking away from almost sealing a deal. The talks are progressing fast, as much of the groundwork was laid in 2008. They are also intensifying, as United is much farther along in its discussions with US Airways , two of the sources said.

The sources spoke on condition of anonymity because details of the talks are not public.

US Air and United's talks have been going on for months. The two parties still have some important issues to resolve, but a deal could potentially happen in a matter of weeks, one of the sources said.

United and Continental came very close to merging in 2008, but the talks fell apart as Continental chose to pursue an alliance instead. Such a merger would create an airline larger than Delta Air Lines Inc , which bought Northwest Airlines in 2008 to become the world's biggest carrier.

United and Continental had resolved all the major issues in 2008 so there is little left to do this time around, sources said.

Under the terms discussed in 2008, Continental's then-CEO Larry Kellner would have been chief executive and then-President Jeff Smisek would have been president of the combined company, sources had told Reuters at the time. Smisek is now the chief executive of Continental.

United CEO Glenn Tilton was to get a seat on the board of the combined company.

The two sides have not agreed to any management terms this time around and talks are not in advanced stages yet, the sources said on Sunday.

United and US Airways declined comment. Continental was not immediately available for comment.

THREE-WAY ALLIANCE

United, Continental and US Airways are all part of Star Alliance, and United has broached the topic of deepening that three-way alliance with each party, but the three carriers have not discussed the subject together yet, the sources said.

The three major global air alliances -- Star, SkyTeam and oneworld -- are global networks of carriers that allow members to streamline costs while sharing revenue. Within Star, United and Continental have permission to share international routes and jointly set fares on those routes.

If the three were to form a deeper alliance that would seek antitrust immunity, getting regulatory approval -- and labor support -- could be difficult.

When United and US Airways announced a $4.3 billion merger in 2000, the deal fell apart on opposition from labor unions and the Department of Justice.

Those issues will likely come up again as the two carriers would end up with a large number of hubs and extensive operations in the Washington area. Regulatory approval for a three-way alliance with antitrust immunity will be even tougher, given the size of the airlines and the overlap in the markets they serve.

The three carriers would have an unparalleled presence in the Northeast, with overlaps in New York, Philadelphia and Washington D.C.

Continental, which has long said it would prefer to remain independent, could opt for a deeper alliance instead of a merger. But at a conference in March, Chief Executive Jeff Smisek did say the carrier would bulk up defensively if it was in its best interest.

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

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

(Additional reporting by Deepa Seetharaman and Kyle Peterson; Editing by Valerie Lee)