Continental not merging with UAL, seeks alliance

Continental Airlines Inc. 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 the matter said on Sunday.

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

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

The decision came after Delta Air Lines and Northwest Airlines said nearly two weeks ago they planned to merge and become the world's largest airline, seeking to counter skyrocketing fuel prices, a weak economy and growing competition from European carriers as trade barriers fall on trans-Atlantic travel.

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 officer Larry Kellner and Vice President Jeff Smisek said in the letter.

After racking up $35 billion in losses and finally emerging from a five-year slump in 2006, US airlines are hoping mergers could give them greater market power to reduce flights and raise fares.

The airlines also face a renewed sense of urgency to cut costs as jet fuel prices have more than doubled since the start of last year.

Continental, which has said it would prefer to remain independent unless the competitive landscape changes, had laid most of the groundwork for a merger with United, sources had told Reuters.

Under terms that were being negotiated, Continental's Mr Kellner would have been chief executive officer of the combined company and Mr Smisek would have been president, sources said. United chief executive officer 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.