Continental rejects a United merger

Continental, which twice survived bankruptcy, is opting to stay independent. (Craig Hartley/Bloomberg News/File 2007)

Continental Airlines said yesterday that it had abandoned merger talks with United Airlines and was planning to remain an independent carrier, a blow to lengthy efforts by United to find a merger partner.

Continental's decision will change the complex game of musical chairs that the airline industry is playing after the merger announcement last week by Delta Air Lines and Northwest Airlines.

Continental's move was a stunning development for United's parent, UAL, which had been negotiating in expectation of reaching a deal by late this week. As recently as Friday, it looked as though Continental, based in Houston, and United, based outside Chicago, were on the way to a merger agreement.

Continental decided to drop the discussions after UAL reported worse-than-expected earnings, which sent shares falling last week. On Tuesday, United said it lost $537 million in the first quarter, on sharply higher costs for jet fuel. The airline, which spent more than three years under bankruptcy protection earlier this decade, said it would cut flights and eliminate a further 1,000 jobs.

Directors at Continental, who met yesterday, feared a merger with United could put their company in peril. Continental, which had been expected to take management responsibilities in a deal with United, survived two bankruptcy filings of its own and has been considered one of the industry's best-run carriers.

With the United-Continental deal scrapped, a new set of pairings is likely. UAL is expected to seek a deal with US Airways, with which it had also been discussing a merger, people involved in the talks said. UAL could not be reached for comment.

Meanwhile, Continental is expected to press ahead with preliminary talks to create a three-way alliance - short of a full merger - with American Airlines and British Airways.