US Airways, United executives may meet

The chief executives of US Airways Group Inc. and UAL Corp.'s United Airlines are expected to meet today to discuss whether to continue negotiations about merging their airlines.

The two carriers have been talking for months, though with more intensity since Delta Airlines and Northwest Airlines proceeded with their proposed merger and United's own talks with Continental Airlines faltered.

Talks between US Airways and United bogged down recently, over obstacles including vehement opposition from labor unions, the financial terms of the deal, and who would be the top management team.

Pilots and flight attendants for both US Airways and United have said they oppose a possible merger. US Airways, which merged with America West in 2005, has still not been able to negotiate unified contracts with its unions for pilots and flight attendants. United pilots have called US Airways' lingering pilot issues, including seniority integration, a "toxic stew."

The New York Times reported yesterday that negotiations were close to falling apart.

The Wall Street Journal, in later online editions yesterday, said that Glenn F. Tilton, CEO of United, and W. Douglas Parker, head of US Airways, were scheduled to meet today to discuss whether further meetings to explore consolidation are warranted.

The published reports quote unidentified sources, including investment bankers and lawyers, with knowledge of the discussions.

Spokesmen at US Airways and United declined to comment.

US Airways, the nation's seventh-largest airline, is the region's dominant carrier, transporting two-thirds of passengers at Philadelphia International Airport.

Tempe, Ariz.-based US Airways operates 429 daily flights out of 84 gates in Philadelphia. The airline employs 6,500 based at the Philadelphia hub.

United, the second-largest U.S. airline, has 20 daily flights out of Philadelphia from four gates. United employs about 200 people here.

If US Airways and United merged, the impact on Philadelphia passengers would be "minimal," Philadelphia's acting aviation director, Charles J. Isdell, said in a recent interview.

One question, though, is whether the city would lose some international services because United has an international hub at Washington Dulles International Airport. Isdell thinks not.

"We believe we would continue to be a hub," Isdell said. "One issue, if this merger happens, is would Philadelphia continue to be an international gateway, as US Airways has developed us? I'm optimistic we would."

The aviation chief said a combined airline would have both Philadelphia and Washington Dulles for flights to Europe and beyond.

A combined US Airways and United would probably eliminate overlapping daily flights to three cities - Los Angeles, San Francisco and Washington - where US Airways and United are now the only carriers flying, Isdell said.

"We would not lose nonstop service from Philadelphia to Los Angeles or San Francisco, but the fares might jump up on flights where there's no competition," Isdell said. "We would still have service to both Reagan National and Washington Dulles, but you might find a tendency for the fares to go up."

The new airline would face not only regulatory scrutiny, but also time pressure if the two parties want a review under the Bush administration. Consolidation under a new administration could face more opposition.

In April, after Continental pulled out of merger talks with United, discussions between United and US Airways stepped up.

United and US Airways reportedly have agreed on some terms: that a combined carrier would be called United and be based in Chicago. Sources familiar with the discussions have said a tie-up could achieve $1.5 billion in annual cost savings or added revenue.

Soaring jet fuel prices add pressure on airlines to consolidate, as they cut capacity - seats and flights - and raise fares. American Airlines last week said it would trim 11 percent of domestic flights and begin charging $15 for a first checked bag on June 15.

US Airways on Friday said it will eliminate free snacks in coach on all domestic flights starting Sunday in a cost-cutting effort due to rising fuel costs. The airline also matched last week's fare increases by United, American, and Delta. The increases are $10 to $60 per round trip and vary with the length of the flight.

Jamie Baker, an analyst at JP Morgan Chase, estimates that airline losses will exceed $7.2 billion this year.

Fitch Ratings, in a report today, lowered its debt rating to negative on $1.7 billion in US Airways' outstanding debt. It blamed the spike in crude oil and jet fuel prices for "eroding margins" across the entire U.S. airline industry.

"Fitch believes that the potential for a liquidity squeeze in early 2009 has increased significantly," the service said in a statement.

Fitch noted that US Airways routes tend to be shorter in length than those of other legacy airlines, making its operational costs "more sensitive to swings in the price of jet fuel."

It said each 10-cent change in the average price of jet fuel translates into approximately $120 million in higher or lower costs for US Airways, Fitch said.

This financial reality is driving the consolidation. US Airways' Parker has said he favors airline consolidation, and in 2007 US Airways made an unsuccessful bid to acquire Delta.

Oil prices and the slumping economy are forcing airlines to make "dramatic changes," Parker told employees earlier this month in a newsletter.

"If done properly, [consolidation] could result in a much healthier industry which would be good for our employees, our customers and the communities we serve," Parker said.