Sunday, May 02, 2010

AP sources: Continental and United to combine

By JOSHUA FREED and DAVID KOENIG, AP Airline Writers Joshua Freed And David Koenig, Ap Airline Writers – 35 mins ago

United Airlines and Continental Airlines agreed to combine in a $3 billion stock swap to create the world's biggest airline, people with knowledge of the deal said Sunday.

The transaction will test the notion that the money-losing airline business can work better on a large scale. Corporate travelers love a wide choice of departure times and a worldwide network, and the combined United and Continental will have flights reaching from Shanghai to South America.

The transaction is to be announced Monday morning after it gained approval from both airlines' boards Sunday, the people said. They declined to be identified because the transaction hasn't been announced.

The companies are expected to describe it as a merger of equals. But travelers will see more of United once the deal closes. The United name will live on and the headquarters will be in Chicago, United's hometown. United shareholders will own about 55 percent of the combined company, the people said.

Continental CEO Jeffery Smisek will run the combined airline. Its chairman will be Glenn Tilton, current chairman and CEO of United parent UAL Corp., who has been looking to do a major airline deal for years. One of the people said the airline's board will include six independent directors from each airline, as well as two union representatives and Smisek and Tilton.

Continental shareholders will get 1.05 UAL shares in exchange for each one of theirs. The companies hope to close the deal by the end of the year, the people said.

To do that they'll need approval from shareholders as well as antitrust regulators. Just 18 months ago the Justice Department allowed Delta Air Lines Inc. to buy Northwest Airlines to form what is currently the world's largest airline. But many in the industry have wondered whether the Justice Department under the Obama administration will be as inclined to approve a mega-airline as it was under George W. Bush.

Continental and United overlap on 13 nonstop routes, J.P. Morgan analyst Jamie Baker wrote in a note on Friday, compared with 12 overlaps in the Delta-Northwest deal. Of the overlapping United-Continental routes, 11 would have just one or two carriers. Baker gave the deal a 75 percent chance of winning regulatory approval.

Regulators like to see as much competition as possible on each route because it helps keep fares down.

Combining Continental and United would leave the U.S. with three big international airlines — the new United, Delta, and American Airlines. US Airways Group Inc. also flies internationally, but its 2009 international traffic was less than one-third that of American's.

United is the nation's third-largest carrier by traffic. Continental Airlines Inc., in Houston, is the country's fourth biggest.

Another key issue will be integrating the pilot work force. One of the people who spoke about the deal said pilots have been briefed, but have not begun negotiations on a joint contract. Aviators at both carriers are represented by the Air Line Pilots Association.

Continental and United both trace their roots to air services founded by Walter Varney in the 1920s and '30s.

One of United's key assets has been its Pacific routes, which it bought from Pan-Am in 1985. It was already the biggest carrier in the U.S., and the Pan-Am deal made it a major international carrier for the first time. Northwest's Pacific routes were one reason Delta pursued that deal two years ago.

Continental jumped in size in 1987 by swallowing Frontier, People Express and New York Air.
Both airlines shrank to cope with the recession. United cut capacity 7.4 percent last year, and Continental shrank 5.2 percent.

And they've both been losing money. Continental reported a 2009 loss of $282 million as revenue plunged 17.4 percent to $12.59 billion. UAL lost $651 million for the year as revenue fell 19.1 percent to $16.34 billion.

The market capitalization for UAL Corp. on Friday was $3.62 billion, while Continental's was $3.12 billion.

Darryl Jenkins, an airline industry consultant, said the United-Continental combination would be the dominant carrier in several of the largest U.S. markets, including New York, Los Angeles, San Francisco and Houston. It would split Chicago with American and cede Atlanta to Delta.
Jenkins said the new United would surpass Delta in attracting prized corporate travelers, who value convenient schedules to places they need to go.

"Now we've got a company that can really clearly compete against Delta," Jenkins said. "Mergers are all about revenue, and this is a tremendous boost for revenue."

Just two years ago, American Airlines was the nation's biggest carrier. First Delta surpassed it, and now United might.

On April 8, when there was talk that United and US Airways were discussing a deal, American CEO Gerard Arpey said the company was "not in any way threatened" by the merger talk involving other carriers.

Smisek, 55, took over as chairman and CEO at Continental at the beginning of 2010 after being its president and chief operating officer. He's been at Continental for 15 years.

Airline analyst Vaughn Cordle said Smisek is a good choice to lead the combined carrier.
"He's on top of the world's largest airline, and has a chance to return to profitability," Cordle said. "That's not a bad thing to do."

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