Apr. 28 — United Airlines is focusing its merger ambitions on US Airways after Continental Airlines' board Sunday backed its management's decision to go it alone, shunning the merger mania that has swept up other major carriers.
Chicago-based United has been pursuing talks with both carriers in recent weeks as it sought a merger partner to help strengthen its international network and boost revenues.
Combining with a competitor represents an attempt to offset the weak economy and overcapacity that has debilitated the U.S. aviation industry.
Continental was considered the best fit for United by most analysts. Its network has very little overlap with United's, while the two carriers' pilot groups also fit well together and seemed likely not to suffer the integration issues that still must be navigated by another merger under way between Delta and Northwest Airlines.
The biggest obstacle to United's first choice, a person close to the talks told the Tribune on Friday, was Continental's management, which despite many weeks of talks was not convinced that a merger was the company's best strategy.
In particular, executives worried that a tie-up to create the world's largest carrier would harm the culture that Continental CEO Larry Kellner had worked so hard to create, with an emphasis on customer service and healthy employee relations. In the end, Continental executives appeared to have gotten cold feet, a United source said.
"We have significant cultural, operational and financial strengths compared to the rest of the industry, and we want to protect and enhance those strengths — which we believe would be placed at risk in a merger with another carrier in today's environment," Kellner and Continental President Jeff Smisek said in a letter to employees released Sunday afternoon.
Sources said that United is now turning to US Airways, with which it unsuccessfully attempted to merge earlier this decade. In a statement, United indicated it won't stop looking for a partner.
"Our strategy is consistent. Consolidation is under way — ensuring you have the right partner is everything. We will pursue all options to ensure a strong, sustainable future for our airline and will not shy away from the tough choices necessary to create value for our shareholders and benefit our employees and customers," United Chief Executive Glenn Tilton said Sunday in response to Continental's decision.
United has been pursuing talks with Arizona-based US Airways for weeks. But the carrier doesn't offer the same strong trans-Atlantic network as Continental, and it has been racked by labor infighting since it combined forces with America West nearly three years ago.
Continental, meanwhile, says it will focus on forming alliances with major players. It had been widely expected to drop out of the global marketing partnership SkyTeam after partners Delta and Northwest decided to merge.
And, according to published reports last week, Continental has been discussing a potential alliance with Texas-based American Airlines.
The merger dance comes at a time of great uncertainty for most US carriers. With jet fuel prices skyrocketing and both business and leisure travelers paring back flying, airlines are losing business and watching their stock prices plummet.
United last week reported a first-quarter loss of $537 million, announced layoffs, cut back capacity and had to fend off questions about its overall financial health. United is managing $8 billion in debt, and analysts think the airline and peers such as American, Delta and Northwest all could violate loan terms this year if oil prices continue to rise.
Continental, which like United has been through bankruptcy, is also facing financial pressure. It lost $80 million in the first quarter and acknowledged in Sunday's letter that it is being squeezed.
"Every US carrier, including Continental, is under enormous pressure from record high fuel prices, a slowing U.S. economy and a weak dollar," Kellner wrote. But the airline isn't seen as being in quite the same straits as United, and Kellner argued in his letter that it had some operational strengths, including its trans-Atlantic route network and hubs in New York and Houston.
A spokesman for Continental's pilots union told The Associated Press that given the weak condition of the other carriers, "we are somewhat relieved" at Continental's decision.
"We look around at the first-quarter financials from the other legacy carriers. Do you really want to swim out to a drowning man and just get pulled down by them?" said Mark Adams.
Though not identifying United by name, the Continental letter amounted to a stinging rebuke of its potential partner. The letter also raised new questions about the industry's direction given that the only healthy major carrier at the moment is discount-focused Southwest and that two other big players, Northwest and Delta, already have thrown in their lot together by announcing merger plans.
Investors are pessimistic about prospects for all the legacy carriers because they all are saddled by high cost structures and have struggled in a cutthroat environment since travel fell off after the Sept. 11, 2001, terrorist attacks.
In the latest indication of trouble in the skies, Eos Airlines Inc., the start-up carrier that offered premium service across the Atlantic, ceased operations Sunday after filing for bankruptcy protection, the latest casualty in the money-losing industry.