Bankruptcy back in focus as airline mergers fade

By Mark McSherry - Analysis

NEW YORK (Reuters) - Any lingering hope that more U.S. airlines could merge their way out of trouble this year appeared to disappear on Friday when United Airlines parent UAL Corp (UAUA.O) and US Airways Group (LCC.N) said they would not go ahead with a deal.

Delta Air Lines Inc (DAL.N) has agreed to acquire Northwest Airlines Corp NWA.N, but industry experts say the other major carriers now have little chance of merging in 2008 as they concentrate on surviving amid sky-high fuel prices and a weakening U.S. economy.

Some industry leaders had seen mergers as a route to capacity cuts and fare hikes to offset crippling fuel costs.

US Airways chief executive Doug Parker told staff in a letter on Friday it is unlikely any merger involving his airline will happen in 2008 "as our industry continues to struggle with how to function in a world with $130 oil prices."

Oil prices hit an all-time high of $135.09 a barrel last week and have roughly doubled in the past year. U.S. crude CLc1 was trading shy of $128 on Friday.

Oil prices have "totally changed the game," said John Armbrust, chairman of consulting firm Armbrust Aviation Group.

"You begin to wonder: Where do (airlines) go from here? They either raise their fares or they have got to shrink themselves to a level where they can become profitable," Armbrust said.

United Airlines chief executive Glenn Tilton, in a message to his staff on Friday, said United would not pursue a merger at this time "due to issues that could significantly dilute benefits from a transaction." He did not elaborate on the issues.

Tilton did say, however, that U.S. airlines face a $20 billion increase in fuel costs and that at current prices, United alone is facing a $3.5 billion rise in fuel costs over last year.

United previously held unsuccessful merger talks with Continental Airlines Inc (CAL.N) and is now said to be discussing an alliance with Continental.

But for now, outright mergers of major U.S. carriers appear unlikely.

"The combination of the oil-related losses, the required downsizing of most carriers domestically, and the labor opposition to many forms of combinations are enough of a deterrent to more airline mergers in 2008," said Mark Schulte, managing director of transportation advisory firm Taurus Corporate Finance Group.

LATEST COLLAPSE

Sky-high fuel prices and a weakening U.S. economy have stalled the U.S. airline industry's modest recovery from the 2001-2006 downturn.

To survive, U.S. airlines have raised fares, added new fees and surcharges, cut jobs, and reduced services and capacity. But unless oil prices ease soon, some experts believe these measures might not be enough.