Continental Airlines Scraps Talks with United

Continental Airlines has called off talks with United Airlines because of the other carrier's weak financial condition, and "the increasing cost of oil increases the risk of doing an airline merger," a source briefed on that matter said Sunday.

David J. Phillip

Continental Airlines planes at Houston Intercontinental Airport.

The source also said Continental Airlines is in "advanced talks" with British Airwaysand American Airlines about a potential alliance, with plans to seek antitrust immunity.

Separately, Continental said in a letter to its employees it has chosen not to merge with any other airline at this time but will continue to consider an alliance with other carriers.

"We have significant cultural, operational and financial strengths compared to the rest of the industry, and we want to protect and enhance those strengths—which we believe would be placed at risk in a merger with another carrier in today's environment," Continental Chief Executive Larry Kellner and Vice President Jeff Smisek said in the letter.

Several details had been agreed upon in the merger talks between Continental and United, including Kellner being chief executive of the combined company and Smisek being president, the source said. United CEO Glenn Tilton was to get a seat on the board of the combined company.

But talks broke off this weekend, with Continental now focusing on an alliance with British and American.

Such alliances allow partners to streamline their costs while sharing revenues. Without antitrust immunity, the data and revenue shared on the routes would normally be considered collusive.

Earlier this month, the U.S. Department of Transportation granted tentative antitrust immunity to the SkyTeam alliance involving Delta Air Lines , Northwest Airlines , Air France-KLM Alitaliaand CSA Czech Airlines.

This approval came just before the announcement of a merger between Delta and Northwest that would create the world's largest airline.

"Every U.S. carrier, including Continental, is under normous pressure from record high fuel prices, a slowing U.S. economy and a weak dollar," the two executives said in the letter.

Continental, which has a marketing alliance with SkyTeam but was not part of the group that received antitrust immunity, will review its participation in that alliance.

American Airlines is part of the 10-member Oneworld alliance, which includes British Airways, Cathay Pacific, Finnair , Iberia and Japan Airlines. But Continental's talks, for now, would focus on grouping with only British and American.