UAUA-CAL Merger Sparks Layoff Fear

Zacks Equity Research, On Friday May 28, 2010, 10:21 am EDT

The proposed merger of U.S. air carriers United Airlines, a wholly owned subsidiary of UAL Corp. (NasdaqGS: UAUA - News), and Continental Airlines (NYSE: CAL - News) triggers concerns of retrenchment, especially in Houston, where Continental is based, and Cleveland, where Continental operates a hub. Since the airline industry is highly unionized, this can pose a problem while integrating the workforce.

The airlines stated that there would be some job losses while integrating the operations of the two companies, but have no plans for large cuts to the combined workforce of approximately 90,000 employees. The deal is awaiting approval from shareholders and an anti-trust review by the Department of Justice.

The chief executive of United Airlines is confident that any U.S. regulatory concerns about the carrier's proposed merger with Continental Airlines will be satisfactorily addressed.

The merger of United−Continental is expected to cost $3.2 billion to United, which would involve compensating each Continental shareholder with 1.05 shares of the former company. This exchange will leave United owning 53% of the newly formed company, which will be christened as United Continental Holdings, with the rest owned by Continental. The combined entity will retain the old name − United Airlines − but will carry Continental’s logo and will be headquartered in Chicago.

The deal will create the world’s largest airline with enhanced capacity and improved service, overtaking Delta Airlines (NYSE: DAL - News), which acquired Northwest Airlines last year. The combined company will be well positioned to succeed in an increasingly competitive global and domestic aviation industry, better positioned than any airline standing alone. The combined company will create a network that can compete for long-haul and high-volume business travel.

The integrated company will have 14 domestic overlapping routes, including Houston-Washington, Cleveland-Denver, Cleveland-Washington, and Houston-San Francisco. It does not have any international overlapping routes.

The airlines expect savings in the range of $200 to $300 million per year from cutting overlapping costs. The combined company is expected to generate annual revenues of $29 billion (United reported $16 billion of revenues in 2009 and Continental reported $12.6 billion) and will save costs in the range of $1.0 – 1.2 billion by 2013.
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