Efforts by United Airlines, a unit of UAL Corp , and Continental Airlines to reach a joint contract with pilots before concluding their merger have hit a snag, pilots said on Friday.

Negotiations on the early stage transition agreement have stalled over issues the pilots say would have little financial impact on the new airline, the Air Line Pilots Association (ALPA) said in a statement.

This merger could be simple if the right path is chosen. Regrettably it appears the companies at this early juncture are headed down the wrong path, said Wendy Morse, chairman of the United pilots' union.

The airlines announced last month that UAL would buy Continental for $3.07 billion in an all-stock deal that would create the world's largest airline. They hope for U.S. government approval of their merger by year's end.

The union was not specific about sticking points but said the companies' have not followed through on their promise to negotiate in good faith.

United and Continental would not comment on details of the discussions held this week in Denver. But the carriers said in separate statements they were confident a full contract could eventually be reached for all pilots.

Integrating union contracts can be some of the toughest aspects of an airline merger.

There is no timeframe for resuming discussions with union leaders representing about 5,000 pilots at Continental and 6,500 at United, a source familiar with the matter said.

Shares of UAL closed down 2.7 percent, while Continental stock finished 2.2 percent lower, both declines exceeding the 1.8 percent fall in the Arca airline index <.XAL>.

Transition agreements include terms for how unions, in this case pilots, will work separately between the merger closure and the point at which the companies combine their employee groups.

This period can last a year or two after which a multi-year contract, or collective bargaining agreement, would come into force. That would also include new terms for wages and benefits.

The new airline expects to employ nearly 90,000 people with few cuts expected once the companies formally join forces, executives have said.

A smooth integration is crucial for the new United to achieve its projected annual cost savings of between $200 million and $300 million.

During the transition period, United pilots will continue to fly the planes and routes they do now as will their counterparts at Continental.

Key issues in transition agreements generally revolve around flight scheduling and job security, especially in the event of a financial downturn.

The pilot groups also have to negotiate a joint agreement governing seniority, which determines flight hours, schedules and certain compensation.

The pilots will get a board seat on the new carrier.

(Reporting by John Crawley; Editing by Carol Bishopric and Tim Dobbyn)

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