US Airways-United merger is off

US Airways has abandoned its plans to seek a merger with United Airlines at this time, its chief executive told employee in a message this morning.

Chairman and CEO Doug Parker said he still believes airline industry consolidation is good and necessary, but the turmoil over high fuel prices worked against pursuing a deal with any other carrier.

"After much work and many conversations with other airlines, we have come to the conclusion that consolidation involving US Airways will not occur at this time.

"This is not to say that something won't occur in the future – as you know I strongly believe that consolidation is required in our industry and that US Airways would benefit from participating.

"Rather it is simply unlikely that anything will happen in 2008 as our industry continues to struggle with how to function in a world with $130/bbl oil prices."

The message didn't cite United Airlines specifically but it's been widely reported for weeks that the two airlines were in merger negotiations.

Messages to their employees from Parker and UAL Corp.'s Glenn Tilton came a day after a meeting at which United disclosed to the smaller carrier its decision not to pursue a deal.

Tilton says that he still supports mergers but that the airline decided this one wouldn't work for now because of issues that could significantly dilute the benefits.

Parker also told his employees that he wouldn't preclude something occurring in the future.

Chicago-based United and Tempe, Ariz.-based US Airways had been exploring a combination for more than two months. But labor and financing issues clouded the effort.

Pairing United with US Airways - the No. 2 and No. 7 U.S. airlines by traffic - would have formed a powerful carrier with potentially the most extensive U.S. and international route networks. It would have been bigger than Delta-Northwest by traffic, leapfrogging current No. 1, AMR Corp.'s American Airlines, as well.

But the deal would have all but certainly entailed significant cuts where the two airlines' operations overlap, including the Washington, D.C., area and parts of the West. There was also the chance of higher fares at a time when ticket prices are already climbing steeply.

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

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 said they opposed 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 called US Airways' lingering pilot issues, including seniority integration, a "toxic stew."

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

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.

A solid plan to merge would have faced not only regulatory scrutiny, but also time pressure if the parties wanted 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 had reportedly 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.

United separately has been pursuing the possibility of an alliance, in which two airlines would work together in many ways but not merge their operations.

Houston-based Continental Airlines Inc. recently rejected United's attempt at a combination but left the door open for an alliance, which could enable them to set pricing and schedules and increase revenue without the integration problems and antitrust scrutiny that come with formal consolidation.

United is currently engaged in alliance talks with Continental, according to a source familiar with the discussions who spoke with the Associated Press.

The source, who requested anonymity because of not being authorized to speak by the carriers, said Continental's separate talks with American Airlines parent AMR Corp. appear to be dormant.

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.

Fitch Ratings, in a report Thursday, lowered its debt rating to negative on $1.7 billion in US Airways's 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 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.

In other airline news, the Italian government has approved moves to sell its 49.9 percent stake in unprofitable airline Alitalia SpA, which Italy has unsuccessfully been trying to sell for a year and a half, Bloomberg News reported today.

The newly elected government is under pressure to act after Rome-based Alitalia said Wednesday that it needs capital "in a very short time" following the collapse of merger talks with Air France-KLM Group and the Italian company's posting a fifth consecutive annual loss, Bloomberg reported.

Traffic dropped 10 percent last year as the airline cut unprofitable routes and the carrier's worsening finances discouraged passengers from buying tickets, according to Bloomberg.