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United Airlines and US Airways have dropped plans to merge, saying the costs of combining would outweigh the savings during a deepening downturn in the industry.

The decision may mean disappointment for British Airways, with United now pursuing a tie up with US rival Continental Airlines. BA boss Willie Walsh was in talks with Continental last week about a possible alliance.

US airlines are under extreme pressure due to the high fuel price and domestic recession. American Airlines announced last week it will axe more than one in ten flights and a planned merger between Delta Air Lines and Northwest Airlines was expected to be the first of many.

US Airways chief executive Doug Parker told staff: “Consolidation will not occur at this time. It is unlikely anything will happen in 2008 as our industry struggles with $130-a-barrel oil prices.”

United chief executive Glenn Tilton blamed “issues that significantly dilute the benefits” and said: “We are evaluating other options.”

A United hook-up with Continental would see the latter switch global alliances from the Skyteam of Air France-KLM to the Star Alliance of Lufthansa and United. BA was courting Continental on behalf of the Oneworld alliance it heads with American Airlines.

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