Continental and United to merge

$3 billion-plus deal will create the world's largest air carrier, surpassing Delta Air Lines and flying to 370 destinations worldwide.

By ASSOCIATED PRESS
May 3, 2010 17:07
3 minute read.
The new logo for United Airlines is shown during a

ua continental 311. (photo credit: AP)

 
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United Airlines agreed on Monday to buy Continental in a $3 billion-plus deal that would create the world's largest carrier with a commanding position in several top US cities.

The new United would surpass Delta Air Lines in size, which should help it attract more high-fare business travelers. It will fly to 370 destinations in 59 countries.

Although the United name will live on, and the company will stay in Chicago, it will be run by current Continental CEO Jeffery Smisek. United CEO Glenn Tilton, a longtime advocate of consolidation in the airline industry, will be non-executive chairman for up to two years before Smisek adds the chairman title.

The new parent company will be called United Continental Holdings Inc., and have about $29 billion in annual revenue based on 2009 results and $7.4 billion in unrestricted cash. The airlines said combining would save them $1 billion to $1.2 billion a year by 2013, including between $800 million and $900 million in new yearly revenue.

The deal would create a giant with major hubs in key domestic markets including New York, Los Angeles, Chicago, Houston and San Francisco and an international network stretching from Shanghai to South America.

It will leave three big US airlines with major international routes — the new United, Delta and American Airlines, with US Airways a distant fourth.

United is the nation's third-largest carrier by traffic, while Continental Airlines Inc., in Houston, is No. 4.

Shares of both companies rose in morning trading Monday. United parent UAL Corp. shares rose 62 cents, or 2.9 percent, to $22.22, while Continental shares rose 63 cents, or 2.8 percent, to $22.98.

Wall Street has pushed consolidation as a way to let airlines raise fares by reducing the number of flights and seats.

Smisek and Tilton said in an interview that the deal won't necessarily mean higher fares, but antitrust regulators are expected to scrutinize the transaction.

Smisek said that the companies don't assume they can boost prices, but that with a bigger network they can attract more high-paying corporate travelers.

Two years ago, Continental walked away from a deal with United at the last moment. Smisek said times have changed since 2008, when both airlines were low on cash and facing record fuel costs.


"Both carriers are performing better than they have been for the past couple of years," he said. "The economy is on an upswing. Fuel prices, although high, are manageable."

Owners of United parent UAL Corp. will hold 55 percent of the combined company, with Continental shareholders owning the rest. Continental shareholders will get 1.05 UAL shares in exchange for each one of theirs.

Although United is buying Continental, the two carriers are similar in size. Based on Friday's closing stock prices, UAL's had a stock market value of $3.6 billion, while Continental's was $3.1 billion.

As for keeping the United name, Tilton told the AP, "The benefit obviously of United Airlines is familiarity in the Pacific and international markets, where it has been a presence longer than Continental."

The companies expect to close the deal in the fourth quarter, with approval needed from shareholders and regulators.


Labor issues have often been messy in airline consolidation. Smisek and Tilton said they had briefed their unions on the deal. Both companies said their boards had approved the transaction unanimously, which would include a labor representative on the UAL board.

Pilots at both airlines are represented by the Air Line Pilots Association. People briefed on the negotiations said the two groups have not started negotiations on a joint contract.

The machinists' union, which represents 16,000 workers at United and more than 10,000 Continental employees, said it was concerned about the impact of the deal on pensions, benefits and job security.

Both United and Continental have been losing money first due to higher fuel costs, then a recession. Last year, UAL lost $651 million while Continental lost $282 million. Revenue plunged 19.1 percent at UAL and 17.4 percent at Continental.

They have eliminated flights to meet the new, lower demand — United cut capacity 7.4 percent last year, and Continental shrank 5.2 percent.

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