A United Airlines jet lands as US Airways jets prepare for flight at Los Angles International Airport in July 2008. The New York Times reported on April 7 that UAL Corp. and U.S. Airways were in the midst of merger negotiations. (David McNew/Getty Images)

By Hugo Martin and Julie Johnsson | Chicago-based United is pondering a merger with US Airways, the third time the companies have attempted to combine their businesses in the past decade and the kickoff to what could be a frenzied round of dealmaking among U.S. carriers.

Negotiations are progressing but there are no guarantees a deal will be completed, said a person with direct knowledge of the discussions. The merger talks were first reported by the New York Times.

But analysts and airline industry observers believe that United’s intent may be to draw Continental Airlines to the bargaining table.

The two carriers, already joint venture partners, would form the world’s largest carrier with a global network reaching from South America to Asia and Europe, making it a potent competitor to current No. 1 Delta Air Lines.

“This looks like an attempt to get something going,” said former Continental CEO Gordon Bethune, who has no direct knowledge of United’s plans. Representatives of Continental, United and US Airways declined comment.

A Continental and United merger would create about $5.8 billion in market value and would generate  cost-savings and new revenues of about $2 billion, estimated Vaughn Cordle, a retired United pilot who is managing director of AirlineForecasts LLC, a Virginia-based market research firm.

Combining United and far-smaller US Airways would generate about 65 percent of that increased market value: about $2.5 billion to $3 billion, AirlineForecasts estimated.

“If Continental doesn’t want to do a full merger with United, US Airways makes for the next-best alternative,” Cordle said via e-mail. “A 65 percent return is better than no incremental increase in value.”

Mergers are increasingly attractive for major U.S. airlines, which have limited options for gaining long-term financial health in an industry that has been rocked by crises over the past decade. During that time, virtually every airline combination imaginable has been vetted, industry insiders said.

Carriers like United struggle to maintain profitability despite heavy cost cuts in recent years that grounded hundreds of aircraft and left tens of thousands of workers without jobs. They have limited means to expand as the market for air travel returns, and little left to cut – aside from operations and overhead that would overlap with a merger partner.

The prospect of more deal-making is unnerving to many consumers, especially since it is unclear what combinations will actually materialize. Mergers inevitably mean the loss off a corporate headquarters and a long-familiar brand as well as fewer flights if airport hubs are combined.

United CEO Glenn Tilton has been an outspoken advocate of industry consolidation, but has had difficulty consummating a deal of his own. Jeff Smisek, his counterpart at Continental, had been intent on remaining independent unless it appeared that recently merged Delta was pulling ahead of the rest of the industry.

Tilton came closest to merging in 2008, when United held talks with Delta, which opted to combine with Northwest Airlines. United tried to join forces with Continental, which concluded that it would fare better alone.

United finally negotiated that year with US Airways, but decided it would rather not risk inflaming labor tensions at both carriers. Instead, Tilton formed a virtual merger with Continental, which joined the Star Alliance.

United and Continental have been the topic of constant merger speculation over the past 18 months as they combined information platforms, shared airport operations, marketed seats on each others flights and formed ambitious partnerships to coordinate flying across the Atlantic and Pacific oceans.

Delta’s successful merger with Northwest is the model United would want to follow, said Roger King, aviation analyst with CreditSights LLC. It has lowered costs and stands to reap far more revenue from its new global network.

“Delta has shown you that those kinds of mergers can work,” King said.

Delta was also able to smoothly absorb Northwest because it gained the cooperation of its pilots union. That will be tougher for others to emulate, especially given the poisonous labor relations at United and US Airways, said Bill Swelbar, an MIT airline researcher.

Five years after US Airways and America West merged, its pilots remain deeply divided and governed by separate contracts and unions. The legacy US Airways pilots are entitled to a hefty payout if the airline merges, one that management has signaled it can’t afford, Swelbar said.

“I still don’t see Glenn wanting this deal,” he added. But US Airways, which has been excluded from United and Continental’s global Star Alliance partnerships, can’t afford to be left out of the dealmaking, he added.

“I have to believe that they too need to be part of the conversation in some way, shape or form,” Swelbar said. “Otherwise, I think they risk irrelevance in the marketplace tomorrow. I have to believe they’re the catalyst here for that reason.”

Some analysts speculate that all three airlines could end up combining.