Continental and United to Merge

By Lee Jeong-eun

United Airlines parent UAL Corp. and Continental Airlines Inc. agreed to merge in a stock swap valued at $3.7 billion that would create the world’s biggest carrier.

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 Amerca.

The $3 billion stock swap gained approval from both airlines' boards Sunday, people with knowledge of the deal 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.

United’s name and Chicago headquarters will be retained, while Continental Chief Executive Officer Jeff Smisek, 55, will become the CEO and United’s Glenn Tilton, 62, will be chairman.

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.

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.

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.

 

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