Dow Jones Newswires-WSJ | Merger talks that came to light last
week between UAL Corp.’s United Airlines and US Airways Group Inc. have
become “very serious,” said one person close to the matter. But they
remain sensitive and it is just as likely the discussions will fall
apart as result in a done deal, this person noted.

Any
transaction would be an all-stock merger, with United being the
surviving entity, this person said. The share premium to be paid to US
Airways shareholders hasn’t been settled. Another person familiar with
the talks said the two sides haven’t yet agreed who would run the
combination.

A deal would create the No. 2 U.S. airline by traffic after Delta Air Lines Inc. If it comes to fruition, it would be announced within two or three weeks. A third person close to the situation suggested that Glenn Tilton, UAL’s chief executive officer, recently restarted the talks.

Chicago-based United, the third-largest U.S. airline by traffic, declined to comment. US Airways, No. 6 and based in Tempe, Ariz., also had no comment.

The two airlines have gotten as far as they have in this round of discussions because they covered much of the number-crunching in spring 2008, the last time they had serious talks, the third person said. The two carriers agreed then that a merger could deliver $1.5 billion in cost and revenue synergies.

But United suspended those negotiations to pursue a marketing alliance with Continental Airlines Inc., a carrier with which it had been having parallel merger talks before being rebuffed by Continental in April 2008.

When United broke off the US Airways discussions the following month, several potential hurdles had been identified, some highlighted by UAL directors, people with knowledge of the matter said at the time. They included how to raise liquidity to fund integration expenses, how to respond to labor contract issues that would have adverse economic consequences and how much flexibility existed for the two to trim more seats from their combined fleet.

Since then, the credit markets have reopened and both United and US Airways have raised significant liquidity. Both have continued to cut capacity to cope with the recession last year, and discount airlines have made gains in their markets. In the past few months, the two have reported rosy year-over-year monthly revenue gains as the recession has eased. Analysts expect them to become profitable later this year.

But labor issues remain, as does the fact that United and US Airways have outsize market share in Washington, D.C., which could spark regulatory interference.

Another wild card is what Continental might do if it is threatened with becoming a very distant No. 4 in the airline pecking order. Some analysts believe the United Airlines-US Airways talks became public as a way to pressure Continental to return to the bargaining table with United. Continental, which now has a marketing alliance with United and is a member of the global Star Alliance group that includes US Airways, declined to comment.

AMR’s CEO, Gerard Arpey, last week said he doesn’t believe a United-US Airways merger would be a problem for his carrier, the No. 2 by traffic. Although fewer airlines probably would be better, he said, “I don’t think necessarily consolidation is the answer to all the economic challenges the industry faces. I don’t think it’s a silver bullet.”

In recent days, some unions at the airlines have protested the renewed idea of a combination. US Airways, itself the result of a 2005 merger with America West Airlines, hasn’t yet negotiated new labor agreements with its pilots and flight attendants — which means they are scheduled separately and assigned to aircraft from either US Airways or the old America West — because the work groups haven’t agreed on combined seniority lists.

“The notion of joining together two airlines in turmoil is absurd,” said the Association of Flight Attendants union, which represents 21,000 cabin crew members at United and US Airways. Mr. Parker, the US Airways CEO, “has failed to negotiate a joint flight attendant labor agreement,” the union said, “That hardly qualifies him to consider the possibility of another merger.”

US Airways pilots have a contract provision that calls for their wages to revert to higher, pre-bankruptcy levels if there is a merger that results in a change of control. They also have contractual rights that limit how many planes their employer can remove from its mainline fleet.

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Peter Sanders contributed to this article.