American Airlines in talks with Continental, US Air

By Jui Chakravorty Das

NEW YORK (Reuters) - American Airlines (AMR.N: Quote, Profile, Research, Stock Buzz) has had early-stage merger talks with US Airways (LCC.N: Quote, Profile, Research, Stock Buzz) and is in advanced talks for an alliance with Continental Airlines (CAL.N: Quote, Profile, Research, Stock Buzz), sources briefed on the situation said on Friday.

News of the talks comes after Delta Air Lines' (DAL.N: Quote, Profile, Research, Stock Buzz) and Northwest Airlines' (NWA.N: Quote, Profile, Research, Stock Buzz) announced nearly two weeks ago they planned to merge to become the world's largest airline, seeking to counter skyrocketing fuel prices, a weak economy and a growing competitive threat from European carriers as trade barriers fall on trans-Atlantic travel.

American Airlines' talks with Continental are focused on forming an alliance that could share passengers, much like the SkyTeam partnership that includes Air France-KLM (AIRF.PA: Quote, Profile, Research, Stock Buzz), Alitalia (AZPIa.MI: Quote, Profile, Research, Stock Buzz), Czech Airlines, Delta Air Lines (DAL.N: Quote, Profile, Research, Stock Buzz), and Northwest Airlines (NWA.N: Quote, Profile, Research, Stock Buzz), the people said.

Alliances have flourished in the industry because they generate profits through marketing programs and flight code-sharing without the headaches of combining operations.

But Continental is also in advanced talks with United Airlines (UAUA.O: Quote, Profile, Research, Stock Buzz) for a full merger, the sources said. Continental will choose either the merger or the alliance, not both, sources said.

Meanwhile, United Airlines is also in serious merger talks with US Airways, and will choose to merge with either Continental or US Airways soon, the people said.

American's talks with US Airways were not serious at this point, one person said.

Aviation consultant Bob Mann said a US Airways-American Airlines merger would not be a marquee matchup and would give American, currently the largest U.S. carrier, little extra depth overseas.