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US Airways, United Discussed Merger

CHARLOTTE, N.C. -- Not surprisingly, US Airways (LCC) talked recently with UAL (UAUA), the parent of United Airlines, about a potential merger, which would revive a deal that was rejected by regulators in 2001.

The two companies were in fact having discussions before Delta (DAL) and Northwest (NWA) announced plans Tuesday to combine, according to a person familiar with the situation.

However, the Delta and Northwest deal has reignited interest in a merger between Continental (CAL) and United, the source said, which could push US Airways out of the picture.

A deal between United and US Airways would provide United with two things it has always lacked: a Southeast hub in Charlotte and a strong presence at key Northeast airports. Additionally, the two carriers already code-share in 270 markets, and are both members of the Star Alliance.

That could make a difference. As Delta CEO Richard Anderson said on Tuesday, existing code-shares and membership in the same alliance give Delta and Northwest a leg up as they move toward their more-than-$3-billion merger.

One thing is certain -- were United to acquire US Airways, the price would be less than the $11.6 billion that United agreed to pay when the deal was proposed in 2000. In fact, some insiders felt that regulators turned down the deal when United backed away after deciding the price was too high.

Shares of UAL rose 2.4% to $22.86, while US Airways fell 1.2% to $8.05.

In a letter to employees on Wednesday, CEO Doug Parker did nothing to diminish speculation that the carrier may become involved in a transaction.

"While we had hoped to remain on the sidelines of merger speculation, today's Wall Street Journal suggests we may be in merger talks with United, and another article in the Dallas Morning News suggests we might make a good merger partner for American," which is operated by AMR (AMR).

"Most of you know my views on consolidation and those have not changed," Parker wrote. "Our industry is far too fragmented, and consolidation, if done properly, could result in a much healthier industry which would be good for our employees, our customers and the communities we serve."

Parker also said that if US Airways does take part in a merger, "we will do so because we believe it is the best interests of our employees and our airline." He added that despite the problems associated with the 2005 merger between America West and US Airways, the carrier is stronger today as a result.

Continental executives told employees this week that a key obstacle to a deal for that company had been removed with the Delta and Northwest announcement. That arrangement gave Continental the ability to redeem a "golden share" that provided Northwest veto power over any transaction involving Continental.

United CEO Glenn Tilton also wrote a letter to workers on Monday, reiterating his longstanding support for consolidation.

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