UAL, US Airways will not merge right now, CEOs say

CHICAGO (Reuters) - UAL Corp's (UAUA.O) United Airlines and US Airways Group (LCC.N) said on Friday they would not merge, a decision that experts said effectively kills the chances of further U.S. airline consolidation this year.

The two carriers, the second and sixth largest in the United States, declined to say exactly why they ended the talks that heated up last month after Delta Air Lines (DAL.N) and Northwest Airlines NWA.N said they would combine to create the world's largest airline.

After racking up $35 billion in losses and finally emerging from a five-year slump in 2006, record high fuel costs have plunged U.S. airlines into a new crisis. Some industry leaders had hoped consolidation would lead to capacity cuts and fare hikes as a way to offset fuel costs.

US Airways Chief Executive Officer Doug Parker and UAL CEO Glenn Tilton announced their decision in separate messages to employees.

"After a considered review by our board of directors, United has determined that it will not be pursuing a merger at this time due to issues that could significantly dilute benefits from a transaction," Tilton said in the message.

Sources have said labor opposition and integration costs torpedoed the deal. Others say UAL shied away from a merger because US Airways lacks a strong international presence.

"It just wasn't the scale of a deal that really solves the problems," airline consultant Robert Mann said, referring to excess capacity in the industry and the dire need for cost cuts and new revenue streams.

Despite mounting pressure to overhaul the industry, carriers are increasingly unlikely to attempt mergers ahead of a U.S. presidential election for fear a new administration could get tougher on antitrust questions and reject some deals that might have got the blessing of the current government.

The whole process would also likely be slowed by related turnover in top officials at the Department of Justice as they got to grips with the subject matter.

United, however, remains in the spotlight as speculation brews that it soon will announce a comprehensive alliance with Continental Airlines (CAL.N).

Tilton said on Friday that UAL is evaluating other options and would take steps to "size the business appropriately, leverage our capacity discipline to pass on commodity costs to customers and accelerate development of new revenue sources."

CALLING AN END TO MERGER TALK

Tilton and Parker -- both vocal advocates for consolidation -- left the door open to future deals, but their decision not to proceed seems to erode the chances of broad industry consolidation in the near term.

"It is simply unlikely that anything will happen in 2008 as our industry continues to struggle with how to function in a world with $130 a barrel oil prices," Parker said.

Merger speculation has been rampant since Delta and Northwest announced their deal in April. Nearly every possible combination of major airlines was discussed, but United remained front and center on reports that it sought a deal with Continental.

Attention shifted to US Airways as United's most likely merger partner, after Continental said it would not merge with United. Some experts believed a UAL/US Airways merger would prompt other mergers among the biggest airlines, although the only other two major airlines - AMR Corp's (AMR.N) American Airlines and Continental -- appear less inclined to merge than their rivals.

"If no one's going to initiate and push, then it's not going to happen," Mann said. "It appears that Parker is pushing, but it's like pushing rope. You have to have a partner that will pull."

Shares of UAL were down eight cents, or 1 percent, to $8.31 in afternoon trade on Nasdaq. Shares of US Airways were down 27 cents, or 6.3 percent, to $4.05 on the New York Stock Exchange.

(Reporting by Kyle Peterson and Mark McSherry, editing by Mark Porter and Tim Dobbyn)