United-US merger finally killed off

United's take-over of US would have been the biggest airline acquisition in history

United Airlines and US Airways have called off their planned merger for a second time after the US Justice Department threatened to block the deal.

While mergers can further competition, this one does not

US Attorney General John Ashcroft

The $4.3bn merger was initially called off by United at the start of July.

The world's second largest airline is understood to have been concerned that the deal would not gain regulatory clearance and worried about the downturn in the US economy.

But hopes were revived just 10 days later at the insistence of US Airways, which said threatened to take legal action if United walked away.

Friday 's decision by the Justice Department is expected to finally kill hopes of a take-over.

UAL, the parent of United Airlines, has agreed to pay the $50m termination fee provided for in the merger agreement.

Reduced competition

The Justice Department said the United take-over, which would have been the largest-ever airline purchase, would have reduced competition, raised fares and harmed consumers.

"UAL Corporation intends to work with US Airways to determine the appropriate steps that need to be taken now that US Airways has acknowledged that the merger with United will not go forward," United said in a statement.

US Airways said it was disappointed that the deal was called off.

"We nevertheless must respect the Justice Department's decision," it said in a statement.

Federal government officials said families taking holidays, corporate customers and the federal government itself, which spends millions on air travel, would pay the price if the merger were allowed to go ahead.

Higher fares

Attorney General John Ashcroft said: "While mergers can further competition, this one does not."

United's profits have slipped amid an economic slowdown

"If this acquisition were allowed to proceed, millions of consumers . . . would have little choice but to pay higher fares and accept lower quality air service."

The merger would have given United a monopoly or duopoly on nonstop service on more than 30 routes and substantially limit competition on numerous other routes, the Justice Department said.

Consumer choice in airlines would have been severely restricted in hub-to-hub nonstop markets like Philadelphia-Los Angeles, San Francisco-Denver and Pittsburgh-Washington, where US Airways and United are each other's only nonstop competitor, the department said.

Consumers would also have had fewer options on international routes.

Future prospects

US Airways said a merger with the world's second biggest airline, United, was its best chance to remain profitable in an increasingly competitive industry.

While United, which has been surpassed as the world's biggest carrier by American Airlines, has lost nearly $1bn since the deal was proposed and has been hit by labour and operational problems.

Ray Neidl, a New York-based airline analyst for ABN Amro, said that with a formal rejection of the merger, United can "try to get back to trying to fix their airline and cut back the losses they're experiencing, which are much larger than the rest of the industry's."

He added: "US is going to have to find another deal or sell their airline off in pieces."