May 30 (Bloomberg) -- UAL Corp.'s United Airlines suspended merger talks with US Airways Group Inc. because of potential labor costs and is instead seeking an alliance with Continental Airlines Inc., two people familiar with the talks said.

United Chief Executive Officer Glenn Tilton told US Airways CEO Doug Parker of the decision in a meeting yesterday in Chicago, said the people, who asked not to be identified because the session was private. Discussions with Continental are progressing, the people said.

An alliance may allow United, the world's second-largest carrier, to sell tickets on Continental's international routes without having to combine workforces or win regulatory approval. Jet fuel, the airlines' biggest cost, has surged 84 percent in the past year, spurring consolidation in the industry.

``United is so thin over the Atlantic that an alliance with Continental makes sense,'' said Robert Mann of consulting firm R.W. Mann & Co. in Port Washington, New York. Cooperation would boost revenue even if the carriers didn't cut seat capacity, he added.

Jean Medina, a spokeswoman for Chicago-based United, and Andrea Rader, a spokeswoman for US Airways, declined to comment. Calls to Houston-based Continental's media office after regular business hours weren't immediately returned.

Continental is the fourth-biggest U.S. airline and does almost half its flying on international routes.

Delta-Northwest

Continental has been exploring alternatives to its membership in the SkyTeam group of carriers since fellow alliance members Delta Air Lines Inc. and Northwest Airlines Corp. agreed to merge April 14 in a tie-up that will create the world's largest carrier. The Delta-Northwest linkup added to pressure on U.S. carriers to consolidate to help pare expenses.

On April 27, Continental rejected United as a possible merger partner, saying it wanted to remain independent. Continental also has been wooed by AMR Corp.'s American Airlines and British Airways Plc to join the Oneworld alliance.

United suspended the merger talks with US Airways because of concern that the terms of some US Airways labor contracts would erode the potential savings from a merger, the people said. Under the accords, some wages at Tempe, Arizona-based US Airways would rise in a change of control at the airline, the people said.

Star Alliance

Tilton didn't rule out a resumption of the discussions should conditions change, the people said. Meanwhile, United is close to an agreement to bring Continental into the Star Alliance group of airlines, where the two carriers likely would seek U.S. regulatory approval to coordinate schedules and fares, the people said.

The New York Times reported the suspension of the United-US Airways talks earlier.

UAL rose 48 cents, or 6.1 percent, to $8.39 yesterday in Nasdaq Stock Market composite trading. US Airways rose 24 cents, or 5.9 percent, to $4.32 in New York Stock Exchange composite trading.

They're the worst performers this year among 14 carriers in the Bloomberg U.S. Airlines Index. UAL and US Airways have tumbled 77 percent and 71 percent, respectively, compared with a 35 percent plunge for the index. Continental added 90 cents to $14.45 in New York trading and is down 35 percent in 2008.

Credit-Default Swaps

Credit-default swaps contracts on UAL debt jumped 82 basis points to 3,246 basis points yesterday, according to CMA Datavision in London. The contracts, designed to protect bondholders against default, have more than doubled since UAL posted its first-quarter loss on April 22. A rise in price indicates a drop in the perception of a company's credit quality.

While United and US Airways had agreed that a combined carrier would be based in Chicago and likely would gain $1.5 billion in annual savings and added revenue, issues including merging labor groups, capacity reductions and financing had remained unresolved, people have said.

The CEOs' meeting yesterday gave Parker a forum to explain why United should merge with US Airways over staying independent or pursuing the Continental alliance. US Airways is the seventh- biggest U.S. airline.

Their session followed a 14 percent jump in jet fuel prices this month and back-to-back quarterly losses for both UAL and US Airways.

To contact the reporter on this story: Mary Schlangenstein in Dallas at maryc.s@bloomberg.net

Last Updated: May 30, 2008 03:33 EDT