UAL and US Airways Group are in advanced merger talks prompted by Continental Airlines' decision this weekend to walk away from similar talks with UAL, sources with knowledge of the matter said.
A deal could be finalized within the next few weeks and could include meaningful capacity cuts, the sources said. UAL, parent of United Airlines, is also thinking about broadening its global alliance network instead of striking a merger.
Shares of US Airways were up $1.16 or 16.2 percent to $8.32 while shares of UAL shed 38 cents or 2.5 percent to $14.83 on Nasdaq. The two have a combined market capitalization of $2.4 billion.
"It's probably going to get done," said Ray Neidl, an analyst with Calyon Securities.
United and US Airways failed in a merger bid in 2001 over competition concerns. However, several insiders said that a new merger proposal would be different due to changes the two carriers made while in Chapter 11 bankruptcy protection and due to the recent growth of low-cost carriers.
United had been in talks with Continental , which on Sunday pulled out to explore a potential marketing alliance with AMR's American Airlines and British Airways.
Continental called off talks because of United's weak financial condition and a feeling that a merger would risk Continental's own financial health, a source told Reuters on Sunday.
UAL shares have lost nearly 60 percent of their value this year and fell sharply again last week after the company reported a quarterly loss of $537 million.
Continental's decision came as a surprise to United, which had hoped to reach a deal possibly this week, one of the sources said.
Glenn Tilton, the chief executive of UAL who has been a strong proponent of consolidation, did not address the US Airways situation in a message to employees.
(Video: David Faber discusses the potential for a merger)
"We continue to evaluate our options and will do what is right for United," Tilton said.
While sources described the United/US Airways talks as advanced or very advanced, there was no indication they were at the stage that UAL had reached with Continental.
All sources said UAL and US Airways still had a lot of work to do.
Most of the U.S. legacy airlines face few options to counter skyrocketing fuel prices, tougher competition and rapidly deteriorating finances. They are under pressure internally and from investors to merge or take other steps to help themselves.
With news that UAL and US Airways have accelerated discussions, all four major carriers that overhauled themselves in bankruptcy this decade -- UAL, US Airways, Delta Air Lines and Northwest Airlines -- have either reached agreement to pair off or are in the process of doing so. Delta Air Lines agreed to buy Northwest Airlines in an all-stock deal on April 14.
It is widely accepted in the industry that merger proposals would need to be completed this spring to ensure that President George W. Bush's administration conducted the antitrust reviews.
The administration is considered pro business. A number of antitrust and industry experts believe the current administration's Justice Department will approve the Northwest/Delta merger.
Neidl and other analysts view US Airways as a consolation prize for UAL now that Continental has moved on. United would still gain advantages in the South and East, but would gain far less for overseas services, which attract premium paying business customers. US Airways also competes with low-cost powerhouse Southwest Airlines Co <LUV.N> in key markets.
United and US Airways also fly older fleets and have large unions that would have to be integrated. US Airways has been unable to successfully combine its pilot work groups since merging with America West Airlines in 2005.
On the plus side, experts agree, United and US Airways would eventually have to slash capacity to stimulate business. Investors have been cool to plans by Northwest and Delta to grow their operations when both are losing money.
Analysts have said a United/US Airways merger would not be very complex as wages at the two carriers are closely aligned and their fleets would mesh well. The two companies are also part of the Star global marketing alliance.
Low-cost competitors like AirTran Holdings and JetBlue Airways could snap up assets like gates and slots if the Justice Department required the merging companies, as some speculate, to make divestitures to spur competition, possibly in Washington and New York.