US Airways Group Inc said on Thursday it has dropped out of merger discussions with United Airlines parent UAL Corp, a decision that changes the dynamic of similar talks between UAL and Continental Airlines Inc.
US Airways' withdrawal puts Continental at center stage of a potential merger scenario that experts say would stabilize the embattled airline industry. But it also steals some negotiating leverage from UAL, which was courting two airlines at once.
Neither UAL nor Continental has confirmed that they are in talks. Sources close to the discussion say they are, and many experts believe UAL had entered talks with US Airways only to draw Continental -- arguably a better match for UAL -- into separate discussions.
It does create more of a sense of inevitability about United and Continental. Now we're no longer kidding ourselves that US Airways is on an equal par with Continental, said Joe Schwieterman, transportation expert at DePaul University in Chicago.
United can no longer pit one airline against the other and take the best deal, Schwieterman said. So it's taken strategic benefits off of United's plate.
A merger of UAL and Continental would form the world's largest airline, ahead of Delta Air Lines Inc. Some experts say that integrating the two carriers would be easier than merging UAL and US Airways because they have more compatible route structures and labor forces.
US Airways shares tumbled 4.9 percent to $6.43 on the New York Stock Exchange. UAL shares were up 1.3 percent at $21.71 on Nasdaq. Shares of Continental, which reported a larger-than-expected quarterly loss on Thursday, were up 0.6 percent at $21.59 on the NYSE.
After an extensive review and careful consideration, our board of directors has decided to discontinue those discussions, US Airways said.
It remains our belief that consolidation makes sense in an industry as fragmented as ours, the company added.
The US Airways statement was the first acknowledgment by the company that it had been in talks with UAL, their second round of merger discussions in two years. A lone US Airways/United merger proposal foundered in 2001 on competition concerns.
Continental Chief Executive Jeff Smisek declined to comment on the merger developments in a conference call with analysts on the company's results.
UAL would not directly address the US Airways statement but said in a statement it believes the airline industry would benefit from consolidation.
We thoughtfully consider opportunities, based on what's in the best interest of our company, our employees, our customers, our shareholders and the communities we serve, the No. 2 U.S. airline said.
UAL also held talks with Continental in 2008. Continental walked away from those discussions and the two airlines later entered into a strategic partnership that fell short of a merger.
The disclosure by US Airways added more volatility to a sector struggling to gain altitude heading out of a two-year financial downturn triggered by high fuel costs and weak passenger demand.
Some industry experts believe that one airline merger could spur others and that several different combinations of major airlines are possible. The chief executives of UAL and US Airways -- Glenn Tilton and Doug Parker -- are the two most vocal proponents of consolidation for the airline industry, which they say suffers from overcapacity.
US Airways, itself, was formed from a merger of USAir with America West Airlines in 2005. That airline later attempted and failed in a hostile takeover bid for Delta.
The first wave of financial results for 2010 have been mixed. Carriers, in most cases this week, reported improved revenues and effective cost controls, save for stubbornly high fuel expenses.
Continental's widening loss illustrates challenges faced by airlines under pressure by some analysts and executives to consolidate to accelerate capacity reductions. Airline executives also believe the slow pace of economic recovery is a stress on future profits, even though demand is up and fares are higher.
(Additional reporting by John Crawley in Washington and Jui Chakravorty in New York, editing by Gerald E. McCormick)