US Airways discontinues merger talks with UAL

CHICAGO (Reuters) - US Airways Group Inc (LCC.N) said on Thursday it abandoned merger discussions with United Airlines UAL Corp UAUA.O, a move that leaves UAL to pursue ongoing talks with Continental Airlines Inc CAL.N.

The statement from US Airways was the first acknowledgment by the company that it had been in talks with UAL, which is in separate merger discussions with Continental, according to sources.

"After an extensive review and careful consideration, our board of directors has decided to discontinue those discussions," US Airways said.

A merger between UAL and Continental would form the world's largest airline. Neither of those carriers has confirmed their talks.

UAL said in a statement it believes the airline industry would benefit from consolidation.

"We thoughtfully consider opportunities, based on what's in the best interest of our company, our employees, our customers, our shareholders and the communities we serve," the No. 2 U.S. airline said.

Continental, which reported a larger-than-expected quarterly loss on Thursday, declined to comment on the statement from US Airways.

An airline merger could spur industry-wide consolidation as the U.S. airline industry claws its way out of a painful downturn triggered by stiff low-fare competition, volatile fuel prices and, most recently, an economic recession that drained travel demand.

"It remains our belief that consolidation makes sense in an industry as fragmented as ours," US Airways said.

Some industry watchers have said UAL had entered talks with US Airways only to draw Continental into separate talks.

"There really wasn't much savings in a United-US Air merger as there will be in a Continental merger," said John Pincavage, president of a consulting and financial advisory firm for the airline industry in Westport, Conn.

"Continental has the ability to give them more revenue and maybe save them some costs," Pincavage said, adding that a UAL-Continental combination "was not as messy domestically in terms of eliminating hubs and firing people and getting into all sorts of union problems."

UAL has been in merger discussions with US Airways twice before -- most recently in 2008. UAL also held talks with Continental in 2008. Continental walked away from those discussions and the two airlines later entered into a strategic partnership that fell short of a merger.

A source told Reuters a merger is more likely this year than it was two years ago because UAL is a different company than it was in 2008. Furthermore, the industry is healthier and access to credit is easier.

US Airways, itself, was formed from a merger with America West Airlines in 2005. That airline later attempted and failed in a hostile takeover bid for Delta Air Lines Inc (DAL.N).

US Airways shares were down 4.59 percent at $6.45 on the New York Stock Exchange. UAL shares were down 1.7 percent at $21.07 on Nasdaq. Continental shares were up 0.84 percent at $21.27 on the NYSE.

(Additional reporting by Deepa Seetharaman and Jui Chakravorty in New York and Karen Jacobs in Atlanta)

(Reporting by Kyle Peterson; editing by Gerald E. McCormick and Andre Grenon)