Report: United, US Airways talk merger

Updated April 8, 2010 11 a.m. ET

 

Shares of United Airlines parent UAL (UAUA) and US Airways (LCC) were soaring today on reports that the companies are in merger talks. 

 

UAL was up $1.55, or 8.2%, to $20.50, and US Airways shares jumped 87 cents, or 12.8%, to $7.69.

An announcement is not expected for several weeks, and it's possible a deal could fall apart. A big issue was whether the carriers' unions would agree to a merger.

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"US Airways would feed United’s international network and bring in a bigger base of business travelers, especially in Washington," Michael Derchin, an analyst at CRT Capital Group, told Bloomberg News. "They could also take out some unprofitable capacity. It would have some ripple effects for everybody else."

The negotiations mark the latest efforts to consolidate the struggling airline industry, according to The New York Times' DealBook blog, which first reported the news late Wednesday. Both companies have called for greater consolidation within the industry to help prop up falling revenues.

United’s chief executive, Glenn Tilton, has been among the leading proponents for more mergers. The industry has been in consolidation mode ever since it was deregulated in the late 1970s.

The last big deal was Delta's merger with Northwest Airlines in December 2008. The result was the world's largest airline in terms of airplanes and passenger traffic.

"The investor seems to have spoken," Tilton told The Financial Times in February. "The market seems to have suggested that scope and scale in a global business are important."

Years of losses due to high costs and multiple trips to U.S. Bankruptcy Court have resulted in companies whose combined market capitalization is about $4.3 billion. Yet their revenue comes to a combined $27 billion.

The Times was unable to get information on possible terms to the deal. One issue being worked on is the management structure of the combined company, sources told the Times.

Any deal may also be opposed by consumer groups worried that the result will be less and worse service, especially to small communities.

The two airlines have come close to merging several times over the past decade. In 2000, they announced a $4.3 billion deal, only to withdraw after fierce opposition from the Justice Department and unions. They tried again in 2008, but ended talks after several months of negotiations.

There have also been recurring strategic doubts about how well the two airlines fit together.

The carriers have six hubs between them. United's are in Chicago, Denver and at Washington Dulles International Airport. The company has 46,000 employees.

US Airways, with more than 31,000 employees, has hubs in Charlotte, N.C., Philadelphia and Phoenix and extensive operations in the Washington, D.C., area.

Any merger would probably result in closing down a number of the hubs and thousands of job losses as systems are integrated.