United now setting its sights on partnering with US Airways

United Airlines officials reportedly had been talking to US Airways about teaming up, even while in negotiations with Continental. (CHRIS O'MEARA/ASSOCIATED PRESS)

DALLAS - UAL Corp.'s United Airlines is in merger talks with US Airways Group Inc. after being rejected as a suitor by Continental Airlines Inc., five people familiar with the discussions said.

United talked almost daily with US Airways even while pursuing Continental, said the people, who asked not to be identified because the discussions are private. The terms of a tie-up haven't been settled, one of the people said.

A merger may help United stem two straight quarterly losses and compete against the combination of Delta Air Lines Inc. and Northwest Airlines Corp. United had to shift gears yesterday after Continental said it would stay independent.

"UAL's standalone plan is not viable," Credit Suisse analyst Daniel McKenzie in New York told investors in a report, citing a projected drop in cash to $1.3 billion by the end of 2009. "We view US Airways as a suboptimal partner for United."

Spokeswomen from United and US Airways declined to comment.

United is the world's second-largest carrier by passenger traffic, while Tempe, Ariz.-based US Airways is the seventh-biggest in the United States. The combination would retain the number two spot once Delta completes its acquisition of Northwest to vault past American Airlines, now ranked number one.

Continental decided to stay independent after concluding that the risks of a merger outweighed any potential rewards, chief executive Larry Kellner told employees in a letter Sunday. Houston-based Continental instead will focus on a possible shift to a new global airline alliance.

"We continue to evaluate our options and will do what is right for United," United chief executive Glenn Tilton said yesterday in a message to employees.