Continental Airlines and UAL are in talks that could lead to the creation of the world’s biggest carrier, with a market value of $9 billion (£4.6 billion), as merger frenzy gripped the airline sector.

UAL, the parent of United Airlines, initiated the talks three months ago, but Continental did not respond until last month, when US Airways made a hostile bid for its bankrupt rival Delta, sources close to the deal said.

Continental and United both saw the bid as the first round in a protracted effort from US Airways that would lead to a deal creating a powerful No 2 in the industry and a threat to their own survival as independent carriers.

“To some extent the US Airways move was a catalyst,” a source close to the UAL- Continental talks said, “but our talks are in the earliest stages and may not lead to anything.”

There are many obstacles to a tie up between UAL and Continental, not least the potential regulatory concerns about a deal that would create a carrier with a 26 per cent market share in the United States.

Northwest Airlines is also expected to try to spoil the party, sources indicated, as the rival carrier has a golden share in Continental that gives it the right to block any deal that is brought to a shareholder vote.

Northwest recently hired Evercore Partners as a mergers and acquisitions advisor, signalling that it expected to become a player in the industry’s consolidation.

The sources close to the deal told The Times, however, that UAL and Continental could construct a deal that did not need shareholder approval.

Continental has often said that it intends to remain an independent carrier with many of its board members vociferously opposed to mergers in the past. But, at this early stage at least, boards at both UAL and Continental were said last night to have welcomed the talks and to be keen to continue to explore the possibilities of a tie up.

UAL has a market value of about $5 billion, while Continental is worth about $4 billion.Shares in Continental surged more than 5 per cent to $45.04, while UAL stock rose by a similar percentage to $45.37 by lunchtime on Wall Street as buyers rushed into the sector.

Analysts and investors hailed the potential merger partners as a near-perfect fit, with hubs and routes that would compliment each other well.

United Airlines has a strong presence on the West Coast of the United States, has valuable gates at Heathrow and has gained an early stronghold in China. Continental is stronger on the East Coast of the United States, with its hub in Newark, New Jersey, and has a firm base in Latin America.

The American airlines sector, marked by overcapacity and an expensive workforce, has tried in vain since 2000 to consolidate. The need to do so was exacerbated by the terrorist attacks of September 11, 2001, as air travel slumped.

American Airlines’ attempt to merge with US Airways in 2000 is the only big deal to have been attempted in the sector so far, but it was blocked by competition authorities. US Airways has since bought a smaller airline, American West.

• Midwest Air rejected a $290 million hostile bid from its rival AirTran yesterday as America’s smaller carriers joined the move to consolidate. AirTran made a bid to acquire Midwest Air Group for $11.25 a share in cash and stock, a 37 per cent premium to Midwest’s closing share price on Tuesday and an 89 per cent premium to its average price over the past six months. Midwest Air’s board rebuffed yesterday’s offer, too, as it had a previous one earlier this year.

  Mergers and the malaise

• The now-bankrupt Delta Airlines was itself the main purchaser of the profitable assets of Pan Am when the company went bankrupt in 1991

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