ATLANTA — US Airways has broken off talks with United Airlines, leaving United to pursue a deal with Continental Airlines that would reshuffle the lineup in the airline industry.
US Airways, the nation’s sixth-largest carrier, didn’t specifically say Thursday why it ended talks with United, although Continental’s involvement appears to have played a role.
Renewed discussions about airline consolidation come as fuel prices are on the rise. While demand for air travel has improved from recession lows, major carriers are still struggling to turn profits. Several major carriers, including Continental, reported first-quarter losses this week.
Analysts have long maintained that, despite deep capacity cuts that occurred when demand was weak, the airline industry needs to further shrink to become consistently profitable.
United and Continental considered combining in 2008 — the same year Delta Air Lines completed its acquisition of Northwest Airlines — until Continental broke off talks.
The industry landscape has changed dramatically since then.
Continental has a new management lineup since its earlier talks with United, although Continental CEO Jeff Smisek was president and chief operating offer under the previous CEO.
United has also tried to burnish its finances and image in the two years since.
“They’ve been able to improve revenue and cut costs,” said Helane Becker, an analyst with Jesup & Lamont.
US Airways, meanwhile, is the product of one combination and long been the seeker of another.
“US Airways was ready to sign a deal with United when they found out United was more interested in signing a deal with Continental,” said a person who was briefed on the discussions.
The person was not authorized to speak publicly, and spoke on condition of anonymity.
“There are some very hurt feelings in Phoenix,” the person said. US Airways Group Inc. is based in Tempe, Ariz., a suburb of Phoenix.
A US Airways official who spoke on condition of anonymity because the person wasn’t authorized to publicly discuss private conversations said the airline’s decision to break off talks was a business one, not an emotional one. “No one is licking any wounds here,” the person said.
US Airways said that while its board decided to end talks with United, it believes it remains viable as a standalone airline.
“As I have said many times, it is not necessary for us to be direct participants in a merger because the entire industry benefits when consolidation occurs,” US Airways CEO Doug Parker said in a memo to employees.
United, a unit of UAL Corp., based in Chicago, did not directly address US Airways’ comments in a statement, saying only that it continues to believe the industry would benefit from consolidation.
Smisek declined to comment on the US Airways decision and gave only the barest description of his company’s actions on consolidation.
“As you would expect of a responsible management team, we are examining Continental’s options and will take whatever action we believe to be in the best interests of our co-workers, stockholders, customers and the communities we serve,” he said.
US Airways’ announcement came after word that United and Continental had exchanged financial information as a prelude to a possible combination between those two carriers.
Industry experts have suggested that a United-Continental combination makes more sense in part because of how well the two carriers already cooperate with each other. Continental, based in Houston, is currently part of United’s Star Alliance in which they sell seats on each other’s flights and will work closely together on international service.
If United and Continental were to complete a deal, it would create the world’s largest carrier, leapfrogging over Delta.
People briefed on those talks have said bankers for United and Continental are discussing how to value the companies in a stock-for-stock swap.
In the memo to US Airways employees, Parker said that the carrier continues to believe in the merits of consolidation, but for the foreseeable future it intends to remain a standalone carrier.
“I am sure some ‘industry experts’ will suggest that US Airways will be strategically harmed if United now chooses to merge with Continental. They will be wrong,” Parker said.
A merger with United would have helped US Airways gain international scale, but the company still is expected to benefit from improving industry fundamentals as the U.S. economy rebounds, said Standard & Poor’s analyst Jim Corridore.
“We think premium and leisure demand is likely to continue to improve and expect industry capacity restraint to lead to higher fares,” Corridore said.
US Airways is no stranger to the merger game. It previously combined with America West and, while Delta was restructuring in bankruptcy, it made a hostile bid to acquire Delta. That bid ultimately failed, and Delta later acquired Northwest.
One holdup to a United-Continental deal could be a provision in the Continental pilots’ union contract that bars their company from sharing revenue in a joint venture with another U.S. carrier.
The clause is the subject of current negotiations on a new contract. The leader of the pilots’ union at United, meanwhile, has signaled more support for a tie-up with Continental than with US Airways.
Among U.S. carriers ranked by passenger traffic, United is third, Continental fourth and US Airways sixth, just behind Southwest Airlines.