May 30 (Bloomberg) -- UAL Corp.'s United Airlines is pursuing an alliance with Continental Airlines Inc. after concluding that merging with US Airways Group Inc. wouldn't yield enough labor savings, people familiar with the talks said.

United and US Airways confirmed today that they'd halted discussions without specifying their possible partners. United's focus is now on a Continental alliance that would set fares and schedules, boosting revenue for both carriers, the people said.

An alliance between United, the second-largest U.S. airline, and No. 4 Continental may produce most benefits of a merger while avoiding the struggles of meshing unions and winning antitrust approval from the U.S. Justice Department.

``They have to do something, and it's better than nothing,'' said Alan Bender, an airline economist at Embry- Riddle Aeronautical University in Daytona Beach, Florida. ``It's not going to upset their labor groups as much as a merger.''

Continental has been exploring alternatives to staying in the SkyTeam alliance since fellow 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.

``Continental is continuing to review potential alliances,'' Kelly Cripe, a spokeswoman for the Houston-based airline, said today in an e-mailed statement.

UAL, Continental Advance

UAL gained 15 cents to $8.54 at 4 p.m. New York time in Nasdaq Stock Market composite trading. Continental fell 4 cents to $14.41 in New York Stock Exchange composite trading, while US Airways declined 36 cents, or 8.3 percent, to $3.96, a 52-week low.

The United-US Airways discussions ended after more than two months of work. Labor contracts at Tempe, Arizona-based US Airways call for increasing some wages in a change of control, eroding potential savings from a merger, the people said.

Jet fuel has surged 82 percent in the past year, adding to pressure on airlines to consolidate as a way of chopping expenses and finding new revenue.

``After a considered review by our board of directors, United has determined that it will not be pursuing a merger at this time due to issues that could significantly dilute benefits from a transaction,'' Chief Executive Officer Glenn Tilton said in a letter to employees at the Chicago-based airline. ``We are evaluating other options.''

US Airways' View

US Airways CEO Doug Parker told workers in a message today that ``consolidation involving US Airways will not occur at this time.''

``This is not to say that something won't occur in the future,'' Parker said. ``Rather it is simply unlikely that anything will happen in 2008 as our industry continues to struggle with how to function in a world with $130-a-barrel oil prices.''

While Parker and Tilton have championed consolidation among U.S. carriers, both also have been rejected by potential partners. Earlier this year, United was spurned by Delta and Continental. Delta also rebuffed a US Airways takeover bid in January 2007.

``The United guys have more options,'' Robert Mann of R.W. Mann & Co., a Port Washington, New York-based consultant, said yesterday in an interview. ``US Airways has far fewer options simply because they are a smaller player.''

US Airways, the seventh-largest U.S. airline by traffic, was formed in a merger with America West Holdings Corp. in 2005 to exit bankruptcy. It has focused on building revenue by adding ``a la carte'' fees so passengers pay for options they select such as checking a second bag.

Courting Continental

In turning aside United for a merger, Continental said April 27 that it wanted to say independent. Continental also has been wooed by AMR Corp.'s American Airlines and British Airways Plc to join the Oneworld alliance.

An alliance would have fewer risks than a merger, said consultant Michael Roach of Roach & Sbarra in San Francisco. ``The situation in the industry is so perilous right now'' that a merger would be ``fraught with danger.''

A United-Continental alliance would need U.S. Transportation Department approval before being allowed to coordinate schedules and pricing on international flights.

Continental gains about half its revenue from flights outside the U.S., and would shore up United's route system by offering access to customers flying across the Atlantic.

Among U.S. carriers, only Delta and Northwest have secured U.S. approval to collaborate on international flights along with those of their SkyTeam partners.

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

Last Updated: May 30, 2008 16:30 EDT