The chief executive officers of UAL Corp.'s United Airlines and US Airways Group Inc. are discussing a possible merger as rising fuel prices add to pressure for a tie-up. United's Glenn Tilton and US Airways' Doug Parker will try to make progress on labor, financing, seating-capacity cuts and other issues that have slowed work on a combination, said industry sources, who asked not to be named. The face-to-face meeting comes more than two months after the talks began. A 20 percent surge in jet fuel in May is eroding profits and spurred American Airlines' announcement last week of the industry's biggest service reductions. A United-US Airways merger would create “capacity and cost cuts that are necessary in a high-fuel-price environment,'' said Jim Corridore, a Standard & Poor's analyst in New York. United is the second-largest US carrier by passenger traffic, while Tempe, Arizona-based US Airways is No. 7. Jean Medina, a spokeswoman for Chicago-based United, and US Airways spokeswoman Andrea Rader declined to comment about the discussions between Tilton, 60, and Parker, 47. Issues still unresolved in the carriers' talks include how to mesh unions, the people said. Pilots and flight attendants at both airlines have said they oppose a tie-up, and US Airways still hasn't negotiated unified contracts with those work groups after its 2005 merger with America West Holdings Corp. to exit bankruptcy. United and US Airways agreed earlier that a combined carrier would be based in Chicago and would achieve about $1.5 billion in annual cost savings and added revenue, people familiar with the talks have said. USbased carriers have been evaluating merger options since Delta Air Lines Inc. agreed on April 14 to buy Northwest Airlines Corp. in a stock swap now valued at $1.96 billion. Consecutive quarterly losses at both UAL and US Airways reflect the strain on the industry's finances. UAL's $537 million deficit was the biggest among US airlines last quarter, while US Airways posted a $236 million loss. They're also the worst performers this year among 14 carriers in the Bloomberg US Airlines Index. UAL and US Airways have tumbled 78 percent and 72 percent, respectively, compared with a 38 percent plunge for the index. UAL shares traded in Germany rose 13 cents, or 1.6 percent, to the equivalent of $8.04 at 10:12 a.m. Frankfurt time. UAL fell 27 cents, or 3.3 percent, to $7.91 yesterday in NASDAQ Stock Market composite trading. US Airways dropped 36 cents, or 8.1 percent, to $4.08 in New York Stock Exchange composite trading. While both Tilton and Parker have championed consolidation to help pare industry-wide seating capacity and boost fares, they also have been rebuffed in merger attempts. Parker's hostile bid for Delta was rejected in January 2007, and Delta spurned United as a partner and settled on Northwest. A United-US Airways tie-up isn't likely to succeed either, said Julius Maldutis, president of consulting firm Aviation Dynamics Inc. in Bayside, New York. Objections from antitrust regulators, as occurred with a 2000 merger plan between United and US Airways, are only one of the challenges, he said. “There are labor problems, there are management problems,'' Maldutis said. Both airlines have announced plans to trim seating capacity to lower operating expenses, with United saying last month it would cut its flying by 9 percent by year's end. US Airways announced a 4 percent reduction; American's cuts last week will pare domestic seating capacity by as much as 12 percent. Besides a merger, United also is considering staying independent as well as seeking an alliance with Continental Airlines Inc. that would include authority to set pricing and schedules, people familiar with the matter have said. A Continental alliance would provide most of the benefits of a merger while avoiding regulatory challenges and labor integration. Continental rejected United as a possible merger partner on April 27, saying it preferred to remain independent. Houston- based Continental also is being wooed to join AMR Corp.'s American and British Airways Plc in the Oneworld airline alliance. US Airways' $73.75 million of outstanding 7 percent convertible bonds due Sept. 2020 dropped $10.45 to $673 per $1,000 face amount yesterday, according to Goldman Sachs prices. Investors have the right to exchange debt for stock at $24.12 a share. UAL's $726 million of 4.5 percent of convertible bonds due in June 2021 dropped $6.62 to $480 per $1,000 face amount on Tuesday.
