Just when there was a chance of the largest airline coming to fruition, even surpassing the mammoth Northwest-Delta combine, news comes that the CEOs of the two parties concerned, namely Chicago-based United Airlines and Tempe-based US Airways, have formally ended merger negotiations.
The two chief executives confirmed the talks had been suspended in messages to their employees on Friday, a day after a meeting of United's Glenn Tilton and US Airways' Doug Parker at which United disclosed its decision not to pursue consolidation.
This was the second attempt at combining the operations of the No.2 and No.7 American airlines by traffic, after a similar effort in 2001 had been rebuffed by antitrust regulators. However, the current effort assumed additional significance after Delta Airlines and Northwest Airlines agreed to pair up to create the largest airline in the world.(See: The Delta - Northwest merger)
However, the attempt was shadowed by the tightening financial outlook for all airlines, which has dried up cash and made them less attractive for the banks that would have to provide capital, as well as by the likelihood of labour turbulence and difficulties integrating the operations.
Unlike Delta and Northwest who had little overlap by way of routes, the two protagonists in this drama had a lot in common in terms of areas serviced, especially in the Washington DC area and the western part of the US. Therefore, a merger would have entailed significant operational cuts and a very distinct possibility of higher fares at a time when prices have already increased significantly, leading to lower volumes.
Additionally, labor contracts at Tempe, Arizona-based US Airways call for increasing some wages in a change of control, eroding potential savings from a merger.
The discussions ended after more than two months of work. Jet fuel prices have surged 82 per cent in the past year, adding to pressure on airlines to consolidate as a way of chopping expenses and finding new revenue. However, that was one of the reasons cited as to the failure of the merger.
''After a considered review by our board of directors, United has determined that it will not be pursuing a merger at this time due to issues that could significantly dilute benefits from a transaction,'' Tilton said in a letter to employees at the Chicago-based airline. ''We are evaluating other options.''
He said United management ''will take the additional steps to size the business appropriately, leverage our capacity discipline to pass on commodity costs to customers and accelerate development of new revenue sources.''
Parker told workers in a message today that ''consolidation involving US Airways will not occur at this time,'' although he believed in its utility and that the carrier would benefit from such action.
''This is not to say that something won't occur in the future,'' he added. ''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-a-barrel oil prices.''
United's focus is now on an alliance with Continental Airlines that would set fares and schedules, boosting revenue for both carriers. An alliance between United and US No. 4 Continental may produce most benefits of a merger while avoiding the struggles of meshing unions and winning antitrust approval from the US Justice Department. Continental had earlier spurned an acquisition offer from United but is more welcoming of an alliance.
United Airlines gained 15 cents to $8.54 at 4 pm New York time in NASDAQ composite trading. Continental fell 4 cents to $14.41 in New York Stock Exchange composite trading, while US Airways declined 36 cents, or 8.3 per cent, to $3.96, a 52-week low.