UAL Corporation (NYSE: UAUA) and US Airways Group (NYSE: LCC) have decided not to merge, according to the chief executives of both airlines. The executives noted that certain issues could significantly dilute the benefits of a merger transaction right now. They admitted that consolidation was necessary in the industry, but is unlikely to happen in 2008. The comments conclude months of merger talks in hopes of combating rising fuel costs.

Rising jet fuel prices have put substantial pressure on airlines, who were already in a fragile financial state. In fact, several airlines had just recently emerged from bankruptcy last year. Since then, several more have entered into bankruptcy. Mostly, these have been regional players like Frontier Airlines and Honolulu Airlines. However, rising fuel costs threaten to put the major carriers at risk if they cannot find a solution.

Mergers are considered healthy in these situations because a larger company is able to realize better economies of scale. That is, one entity purchasing more jet fuel at one time can get a better deal due to the greater quantity. Additionally, the transportation costs and other associated costs are also lowered for the same reason. Combined with rising fares, this could be enough to save many of the airlines now experiencing problems.

The problem is that the pilot unions are often unwilling to work together or accept steep pay cuts. The strong airline unions have been the culprit behind many of the failed talks, including those involving Northwest. UAL and US Airways did not cite these reasons, but media reports have said that opposition from labor unions and the costs of integration were the two key factors behind the decision not to merge.

Ultimately, the decision not to merger could cost both airlines a lot of money if jet fuel prices continue to rise at their current rates.

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