By Jui Chakravorty
NEW YORK (Reuters) - CONTINENTAL (CON.XE)Airlines Inc
The talks are in very early stages, though much of the groundwork was laid in 2008, the source said. United and Continental came very close to merging at the time, but the talks fell apart as Continental chose to pursue an alliance instead.
The talks come as United is in similar discussions with US Airways Group Inc
UAL, Continental and US Airways declined comment.
Shares of UAL rose 3.4 percent while Continental rose 1.8 percent following the news, which was first reported by the New York Times. US Airways shares dipped 0.7 percent.
Since the news of the United-US Airways talks broke last week, shares of UAL have surged more than 22 percent, despite reports that it would be the acquirer in a deal with US Airways.
US Airways shares have risen 9 percent since then, and Continental has climbed 15 percent, reflecting investor expectations of a resumption in United-Continental talks.
"I think it's the path of least resistance from a labor perspective, from a regulatory review perspective and from a political perspective," Stifel Nicolaus analyst Hunter Keay said.
CONSOLIDATION NEEDED
Many airline executives have called for consolidation, saying it is a necessity to allow the industry to return to profitability.
Airlines, struggling with high fuel prices and a pullback in consumer spending amid a weak economy, have lost $50 billion in the past 10 years, according to the International Air Transport Association.
The industry lost $11 billion in 2009 alone.
Still, Continental has long said it would prefer to remain independent. But at a conference in March, Chief Executive Jeff Smisek said the company would "bulk up defensively" if it would be in its best interest.
A Continental-United merger might be easier to get through the labor unions, which can be a major force in getting a deal approved.
Capt. John Prater, president of the Air Line Pilots Association (ALPA) union, told Reuters in February that a United-Continental merger would make more sense than other possible combinations.
A spokesman from ALPA at United was not immediately available for comment on Thursday.
A spokeswoman for Continental's pilots union said the group had "no reaction" after news broke Thursday. But UAL's pilots union said last week the pilots would not benefit from a merger with US Airways, adding it would "vehemently oppose" a merger that would not lead to a strong and viable carrier.
Even after United and Continental halted merger talks in 2008, their pilot groups have continued to talk up two to three times a week and discuss the possibility of a merger, Capt. Jay Pierce, head of Continental's pilot union, told Reuters in an interview last week.
They have discussed a collective bargaining agreement and talked about a process to merge seniority lists, Pierce said.
(Additional reporting by Deepa Seetharaman, Kyle Peterson and Karen Jacobs, editing by Leslie Gevirtz and Gerald E. McCormick)
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