United and Continental to merge

By Aaron Smith, CNNMoney.com staff writer


NEW YORK (CNNMoney.com) -- UAL Corp.'s United Airlines announced on Monday it will merge with Continental Airlines in a deal worth $3.2 billion, creating the world's largest airline.

The combined company, which will fly under the United moniker and Continental logo, is now larger than Delta Air Lines (DAL, Fortune 500), which became the country's largest airline when it merged with Northwest Airlines in 2008. It is expected to serve more than 144 million passengers per year and fly to 370 destinations in 59 countries.

"Combining these two companies is the best way to position ourselves ... to thrive in the changing and competitive airline [industry,]" said Jeff Smisek, chief executive of Continental, in a press conference with Glenn Tilton, chief executive of UAL Corp. "Continental is strong where United is weak; United is strong where Continental is weak. Putting these two carriers together is a match made in heaven."

Under the terms of the deal, Continental shareholders will receive 1.05 shares of United common stock for each Continental common share they own, the companies said in a statement.

United shareholders would own approximately 55% of the combined company and Continental shareholders would own approximately 45%.

As a result of the merger, the companies expect to have annual revenues of $29 billion and save between $1 billion and $1.2 billion over the next three years.

United and Continental discussed combining in 2008 and Houston-based Continental backed out. United boasts a stronger financial position this time around though.

Last week, the Chicago-based company reported a first-quarter loss of $82 million, much narrower than the $382 million loss posted a year earlier. And revenue jumped 15% to $4.2 billion.

Thanks to an improved financial performance, United was expected to have more weight in the talks. Last weekend, the company pushed to base the deal on the closing price of its shares the day before an agreement is signed.

The stock prices for UAL (UAUA, Fortune 500) and Continental (CAL, Fortune 500) edged up slightly at the start of trading. This is after Continental's stock fell 1.5% on Friday, while UAL was little changed.

Assuming the deal clears antitrust hurdles, the combined airline would be based in Chicago, United's home, and its largest hub will be Houston, Continental's base, according to the executives. The holding company will be named United Continental Holdings and the carrier itself will be named United Airlines. Continental chief executive Smisek will serve as CEO of the merged company.

"Let Jeff [Smisek] experience the challenges for a little while," said Tilton in a press conference, noting that he was CEO of UAL for eight years, while Smisek has been CEO of Continental for one quarter.

Airfares: Up or down?

When asked if the merger will drive up airfares, Tilton of UAL replied, "Airfares are not something that we set. This is a brutally competitive industry. There is no carrier in the world that can set airfares."

Robert W. Mann, Jr., airline industry consultant, said that airfares probably won't be affected between major cities, but they could increase for some international flights and for flights into and out of smaller cities, where the carrier has more pricing control.

Harlan Platt, a finance professor who covers the airline industry at Northeastern University's College of Business Administration, said the merger would allow the airlines to control more than 80% of international flights to and from major airports in Newark, N.J., Houston and San Francisco.

He said this would give the merged airline more pricing control, but it also presents a potential hurdle to the Justice Department approving the deal. The regulator could force the airlines to give up some of their gates at these airports.

Raymond Neidl, an airline consultant and analyst, said consolidation is the best thing for the highly competitive airline industry.

"This is necessary not only for the carriers but for consumers as well since a financially stable industry is needed to serve the traveling public and this merger should contribute towards that goal," he said.

He described the industry as crowded with "too many airlines with too many hubs offering too many seats."

Last month, United also discussed the possibility of merging with Phoenix-based US Airways (LCC, Fortune 500).

Rick Seaney, chief executive of FareCompare.com, said that other mergers are unlikely, unless fuel prices continue to rise and put further pressure on the industry.

"It is hard to imagine any other big airline players linking up in the short term, but all bets are off if oil zooms up over $100 a barrel," said Seaney.

CNNMoney.com's Hibah Yousuf and Ben Rooney contributed to this story To top of page

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