May Pursue New Alliance With AAL, British Airways

And there was much rejoicing in Houston... but for how long? On Sunday, Continental Airlines said it had abandoned merger talks with United Airlines, and declared its intention once again to remain an independent carrier.

The New York Times reports Continental's decision was a clobbering blow to United, which reportedly hoped to announce a merger with Continental later this week.

"The board very carefully considered all the risks and benefits of a merger with another airline, and determined that the risks of a merger at this time outweigh the potential rewards, as compared to Continental’s prospects on a stand-alone basis," wrote Continental CEO Larry Kellner, and president Jeffery A. Smisek, in a letter to Continental workers.

The executives added they feared a merger with United would place the airline "at risk," both competitively and financially... an apparent reference to the staggering $537 million Q1 2008 loss United posted last week.

United CEO Glenn Tilton, a proponent of industry consolidation, reiterated his intent to find a partner to dance with... even as his options become less and less desirable.

"Consolidation is under way. Ensuring you have the right partner is everything," Tilton said Sunday. "We will pursue all options to ensure a strong, sustainable future for our airline and will not shy away from the tough choices necessary to create value for our shareholders and benefit our employees and customers."

After being shunned by Continental, industry insiders believe Tilton's second choice will likely be US Airways. CEO Doug Parker is also a rabid advocate for industry consolidation, and fought unsuccessfully to merge with Delta Air Lines over one year ago.

United has since stepped up what had been preliminary merger talks with US Airways, according to industry reports. However, a US Airways merger is seen as less desirable to United than joining with Continental, particularly in the area of employee relations.

Almost three years after its merger with America West, Tempe, AZ-based US Airways is struggling to overcome employee dissension, particularly among its pilots... and it's no secret a large portion of United's workforce is also dissatisfied with Tilton & Co.

In opting to not pursue a merger, Continental did leave the door open for partnerships of a different nature... particularly, in the area of airline alliances. Analysts tell the Times Continental has entered preliminary talks with American Airlines and British Airways, to form a three-way, cross-border code-sharing partnership.

"We are considering alternatives to SkyTeam" -- Continental's current alliance with Delta and Northwest -- "as we carefully evaluate which major global alliance will be best for Continental over the long term," executives said Sunday.

As ANN reported, on April 14 Delta announced its intent to merge with Northwest Airlines, forming what would be the largest airline in the world if approved by regulators. That announcement also triggered the latest wave of merger speculation.

Though decried by consumer rights advocates -- who point out mergers lead to reduced competition, and thus higher airfares -- those in favor of consolidation say it could be the only way the fractious US domestic airline industry will survive the current economic slump, and record high fuel prices. Those proponents say mergers would allow airlines to trim costs, and to raise airfares to profitable levels.

FMI: www.united.com, www.continental.com