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Why the United/US Airways Merger Collapsed

Stocks in this article: LCC UAUA CAL DAL

TEMPE, Ariz. TheStreet) -- Before US Airways (LCC) broke off merger talks with United (UAUA) on Thursday, the two airlines had talked for months and had reached agreement on many key issues including the selection of Glenn Tilton as CEO of the merged company, say people familiar with the talks.

But United executives were uncomfortable with the requirement that because US Airways pilots have a change of control provision in their contract, the deal would have to be structured in a way that US Airways acquired United, said the people, who could not be named because they were not authorized to speak about the negotiations.

The United executives' feeling was that it would be extremely difficult for US Airways to assemble the financial resources needed to amply reward shareholders in a far larger company with three times the market capitalization.

Nevertheless, the talks progressed. Eventually, the two sides "agreed the company would be named United (and) headquartered in Chicago, would have two thirds of the board from United and (would have) Tilton as CEO," a source said. US Airways CEO Doug Parker was willing to step aside, the source said, noting: "Doug was going to act in what he believed to be the best interest of his company and his employees."

United's preference to merge with Continental (CAL) was, obviously, not news to US Airways executives. But those executives believed they should go ahead and pursue a deal that would so clearly benefit the company. Parker, like predecessor Stephen Wolf, believes that US Airways is not well-positioned for long-term survival because it is neither a major global airline nor a low-cost domestic airline.

Parker was also well aware that the necessity to structure a deal as a US Airways acquisition was a problem. On March 17, at the conclusion of a meeting with pilots at US Airways' Charlotte training center, he raised the topic, telling pilots that the change of control provision was a barrier to any merger the carrier might pursue. The provision snaps wages back to a pre-2000 level, far higher than today's pilot wages, if a change of control occurs.

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