United, Continental could announce merger on Monday
Updated 43m agoBy Dan Reed, USA TODAY

United and Continental airlines have reached the precipice of a merger agreement that their executives hope to announce on Monday, a source involved in the negotiations said Friday.
The announcement hinges on the boards of both airlines approving the deal, said the source, who is not authorized to speak for the airlines and requested anonymity. The board of United's parent, UAL, is to meet today. Continental's board is supposed to meet today and Sunday.

A union between Chicago-based United, the third-largest U.S. carrier, and No. 5 Continental, based in Houston, would create the biggest airline in the world. Based on passenger miles flown in 2009, the combination would be about 10% larger than the current world leader, Delta Air Lines.

Plans are that the merged airline would be based in Chicago and that Continental's name would disappear eventually. United had no comment. Continental didn't return a call. And the source said the deal still could fall apart before Monday.

United and Continental reached a similar point in merger negotiations almost two years ago. But at the last minute, Continental's board elected to remain independent.

The source says that Continental CEO Jeff Smisek would become CEO of the combined airline. United CEO Glenn Tilton would be the non-executive CEO for two years.

"I think it's a good move," says Bob Harrell, an airline industry consultant.

A merger would need approval from regulators, and some routes now flown by both carriers, such as between Chicago and the New York/Newark area, may draw attention.

But Continental and United generally have little overlap in the markets they serve, he says.

Continental's hubs are in Houston, Newark and Cleveland. It has a large presence in Latin America, where it is a strong No. 2 behind American.

United's hubs are in Chicago, Washington and Denver. It also has big operations in San Francisco and Los Angeles. Those are major gateways to Asia, where it has a major presence.

Tom Parsons, CEO of Bestfares.com, says the merger would most hurt consumers who fly in and out of smaller regional airports that are served by both airlines. Reduced service and choice in such markets are likely.

"You're going to pay a premium for this merger," Parsons says. "The only way you're going to have lower airfares in 2011 is if a lower-cost airline comes to your city. If not, expect to pay more. It's sad for the consumer."

Seethu Seetharaman, a professor of management at Rice University's Jones Graduate School of Business, says it's possible for mergers to reduce fares if they create economies of scale and savings get pushed down to the consumer.

"But of all the merger situations I've studied or read about closely, I've never seen a situation in which prices went down," he says.