Fuel not a dealbreaker as UAL/USAir talks founder

By John Crawley

WASHINGTON (Reuters) - The challenge of skyrocketing fuel costs was not a dealbreaker in failed merger talks between United Airlines parent UAL Corp (UAUA.O) and US Airways Group Inc (LCC.N), and in fact had been a force pushing them together.

The two airlines gave no specific reasons for ending their discussions on Friday, but sources have said labor integration costs and other expenses associated with consolidation played a large role in the outcome.

"The price of oil was not a stumbling block in this," said one person familiar with the ill-fated discussions. "That was a motivating factor."

United Chief Executive Glenn Tilton told employees the talks would not yield a proposal due to "issues" that could "significantly dilute" the financial benefits of a tie-up.

United and US Airways officials would not comment beyond separate statements from Tilton and his US Airways counterpart, Doug Parker.

But people familiar with the talks over the past month and industry experts painted a fuller picture of challenges faced by the two companies had they decided on a common future.

"These mergers take cash. There's always alleged synergies down the road but they need cash now for severance payments, to get out of leases," said Roger King, an analyst with CreditSights Inc. "No one can afford to make the investments in those things now."

For instance, a source with knowledge of the negotiations said the contract for a majority of US Airways pilots would get much more expensive in a merger. In addition, there would be extra costs associated with aircraft orders at US Airways, not all of them financed.

For United, the company could have faced significant costs, including those related to credit agreements with lenders, if a merger were to occur.

"These were large issues," the source said.

Another source said the two sides were never on the verge of reaching an agreement, although the talks at one stage were described as very advanced.

While sources said fuel prices did not scuttle the talks, King guessed the two would have merged had crude prices been where they were four months ago -- $90.

Tilton and Parker were under pressure to decide by early June to ensure a Bush administration review of any merger by Justice Department antitrust enforcers. The administration, considered business friendly, leaves office in January.

Both CEOs have been strong proponents of consolidation as a remedy for crippling industry-wide cost pressures caused by crude oil prices hovering near $130 a barrel. Some analysts have begun to warn of possible airline bankruptcies in 2009.

Shares of US Airways and United have plummeted in the past year and the two lost more than $750 million combined in the first quarter.