[Gerald A]

United In Alliance Talks With Continental

May 16, 2008

United Airlines has begun talks with Continental Airlines for a possible alliance even as its merger talks with US Airways continue to advance, sources briefed on the matter said.

United will make a decision on whether to merge with US Airways soon, two people said, adding that a deal with US Airways is likely, but not imminent. The sources declined to be identified because of the confidential nature of the talks.

Although United's board of directors had a meeting on Thursday, no decision is expected, the people said.

Continental Airlines, which called off merger talks with United in late April, is also in advanced alliance talks with American Airlines and British Airways, sources have previously said.

The wave of talks come after Delta Air Lines and Northwest Airlines said in April they planned to merge and become the world's largest airline, seeking to counter high fuel prices, a weak economy and growing competition from European carriers as trade barriers fall on trans-Atlantic travel.

After racking up USD$35 billion in losses and finally emerging from a five year slump in 2006, US airlines are hoping mergers could give them greater market power to reduce flights and raise fares.

The airlines also face a renewed sense of urgency to cut costs as jet fuel prices have more than doubled since the start of last year.

Continental, American and British are looking at forming alliances and then seeking antitrust immunity. United would also seek immunity if it were to form an alliance with Continental, one of the sources said.

Airline alliances allow partners to streamline costs while sharing revenues. Without antitrust immunity, the data and revenue shared on the routes would normally be considered collusive.

Earlier this month, the US Department of Transportation granted tentative antitrust immunity to the SkyTeam alliance involving Delta, Northwest, Air France-KLM and Alitalia.

Continental, which has a marketing alliance with SkyTeam but was not part of the group that received antitrust immunity, has said it would review its participation in that alliance.

Analysts have said a United-US Airways merger would not be very complex as wages at the two carriers are closely aligned and their fleets mesh well. The two are also part of the same global marketing alliance.

UAL's market value stands at USD$1.8 billion, while US Airways is valued at USD$657 million, one of the lowest among major carriers.

A United-US Airways deal foundered in 2001 on antitrust concerns. But consolidation proponents say the industry and the two carriers have changed dramatically.

Both have restructured hubs and routes during long stays in bankruptcy, and United has cut domestic capacity to focus more on international routes.

(Reuters)

Gerald