US Airways Out of Merger Talks for Now

TEMPE, Ariz. ( TheStreet) -- The airline industry focused Thursday on the possibility of a merger between Continental ( CAL) and United ( UAUA), as US Airways moved to the sidelines -- at least for now.

Thursday morning, as the Continental earnings conference call was starting, US Airways said it broke off merger talks with United. "We have recently held discussions with United Airlines regarding a possible combination between our two airlines," said CEO Doug Parker, in a prepared statement. "After an extensive review and careful consideration, our board of directors has decided to discontinue those discussions."
US Airways

In opening remarks during the Continental call, CEO Jeff Smisek said, "As you would expect of a responsible management team, we are examining Continental's options." He declined to comment further.

In his statement, Parker noted that consolidation would benefit US Airways even if the carrier was not involved in a merger, echoing what AirTran ( AAI) CEO Bob Fornaro said on an earnings call on Wednesday.

Fornaro said that a Continental/United merger, if it were to occur, would likely result in diminished capacity in the eastern U.S., which would benefit AirTran. "The most likely reduction probably comes in a place like Cleveland," where Continental has a hub, Fornaro said. The Cleveland hub provides some of the connections also offered at United's Chicago hub. AirTran is the principal carrier at Akron/Canton Airport.

Fornaro said that AirTran would not initiate a merger effort, but it would listen to an offer -- or be a "facilitator." In a recent case, AirTran would take over slots at Washington Reagan National Airport if regulators approve a slot swap between Delta ( DAL) and US Airways.

Nobody thinks US Airways has given up on participating in a merger. Since the late 1990s, when CEO Stephen Wolf talked to every carrier who would listen before eventually moving ahead on a deal with United, US Airways has sought a partner because its directors and executives realize that it has neither a hub big enough to support vast international flying nor costs low enough to compete indefinitely with low-cost carriers.

US Airways pilots "believe our management team is still focused on a merger," said James Ray, spokesman for the U.S. Airline Pilots Association. The executives "truly believe consolidation is good for the industry, and it particularly would be good for our airline. I don't think they are any less focused on consolidation today than they were yesterday."

In a letter to employees on Thursday, Parker said, "we continuously consider strategic options for our airline and over the past several months, we have studied a transaction with United. However, those talks have not progressed to a merger agreement, and for the foreseeable future we intend to remain a standalone carrier.

"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," Parker added. "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.

"Should our competitors choose to merge and help create a more stable airline industry, our independent airline will only become stronger," Parker said.

In early afternoon trading, US Airways shares were down 30 cents to $6.46. United shares were down 15 cents to $21.28. Continental shares were down 13 cents to $21.33.

-- Written by Ted Reed in Charlotte, N.C.

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