UAL and US Air merger talks advance: sources

By John Crawley

WASHINGTON (Reuters) - UAL Corp and US Airways Group Inc are in advanced merger talks prompted by Continental Airlines Inc's decision this weekend to walk away from similar talks with UAL, sources with knowledge of the matter said on Monday.

A deal could be finalized within the next few weeks and could include meaningful capacity cuts, the sources said. UAL, parent of United Airlines, is also thinking about broadening its global alliance network instead of striking a merger.

Shares of US Airways were up $1.16 or 16.2 percent to $8.32 while shares of UAL shed 38 cents or 2.5 percent to $14.83 on Nasdaq. The two have a combined market capitalization of $2.4 billion.

"It's probably going to get done," said Ray Neidl, an analyst with Calyon Securities.

United and US Airways failed in a merger bid in 2001 over competition concerns. However, several insiders said that a new merger proposal would be different due to changes the two carriers made while in Chapter 11 bankruptcy protection and due to the recent growth of low-cost carriers.

United had been in talks with Continental, which on Sunday pulled out to explore a potential marketing alliance with AMR Corp's American Airlines and British Airways Plc.

Continental called off talks because of United's weak financial condition and a feeling that a merger would risk Continental's own financial health, a source told Reuters on Sunday.

UAL shares have lost nearly 60 percent of their value this year and fell sharply again last week after the company reported a quarterly loss of $537 million.

Continental's decision came as a surprise to United, which had hoped to reach a deal possibly this week, one of the sources said.

Glenn Tilton, the chief executive of UAL who has been a strong proponent of consolidation, did not address the US Airways situation in a message to employees.

"We continue to evaluate our options and will do what is right for United," Tilton said.

DEAL MAKING

While sources described the United/US Airways talks as advanced or very advanced, there was no indication they were at the stage that UAL had reached with Continental.

All sources said UAL and US Airways still had a lot of work to do.

Most of the U.S. legacy airlines face few options to counter skyrocketing fuel prices, tougher competition and rapidly deteriorating finances. They are under pressure internally and from investors to merge or take other steps to help themselves.