Global Airport News

Global Airport News

United Airlines parent UAL will buy Continental Airlines for USD$3.2 billion, forming the world's largest carrier in a merger that further shrinks the embattled US airline industry and could drive up air fares, sources said on Sunday.

The boards of directors of both companies unanimously approved the deal, which was expected to be announced by the carriers on Monday morning, sources familiar with the discussions said. UAL and Continental declined to comment and neither airline has confirmed the votes.

If given regulatory approval, the carrier would be called United Airlines and would be based in Chicago, with over USD$29 billion in annual revenue, a source said. The deal would generate up to USD$1.2 billion in revenue and cost benefits for the combined company.

"The combined firm would have more staying power than each of them individually," Robert Mann, airline consultant at RW Mann, said. "Part of it is the consolidation provides pricing power and the opportunity for pricing power for the entire industry."

"The margins on the combined business would be better," Mann said. "The share of revenue that's consumed by revenue will be lower. Margins will be better."

The airline industry is recovering from an economic downturn that drained travel demand and forced carriers to downsize.

Experts have said consolidation would lend much-needed stability to the industry, which has been dogged by low-fare competition, terrorism concerns, volatile fuel prices and overcapacity.

ALL-STOCK DEAL

United and Continental have agreed to an exchange ratio of 1.05 UAL shares for each Continental share in an all-stock deal, the sources said. That value would be determined by the market, and could change by the time the deal closed.

Based on United's stock price of USD$21.83 on Friday afternoon, and Continental's 139.6 million outstanding shares as of April 21, United would pay USD$3.2 billion for Continental.

Based on current shares outstanding, a combined company would have 314.5 million shares, and UAL shareholders would own roughly 53 percent of the new company.

Under the terms for the all-stock merger, UAL chief executive Glenn Tilton would become non-executive chairman of the combined carrier while Continental CEO Jeff Smisek would become chief executive.

The carriers are planning a 16-member board with six directors from each airline, plus Tilton and Smisek, and two seats from unions. The airlines hope for US regulatory approval of the proposed merger by year's end.

The new company on paper now would have a combined work force of nearly 90,000 employees and a combined fleet of 693 planes.

United Airlines took in more than USD$16 billion in operating revenue for 2009. The carrier has hubs in Los Angeles, San Francisco, Denver, Chicago and Washington, DC. The carrier boasts a strong presence on Asia-Pacific routes, Europe and Latin America.

The carrier has 46,000 employees and a mainline fleet of 360 planes.

Continental, which saw USD$12.6 billion in annual revenue for 2009, has about 41,000 employees and hubs in Newark, New Jersey, Houston and Cleveland. Continental has a mainline fleet of 333 jets.

The unions representing pilots at UAL and Continental did not have immediate comment.

Although Captain John Prater, the president of the Air Line Pilots Association, which represents UAL and Continental pilots, said in February that a merger of the two carriers made more sense than other possible combinations because they have less route overlap.

UAL and Continental are both members of the global Star Alliance of airlines. UAL shares trade on Nasdaq. Continental shares trade on the New York Stock Exchange.

LONG TIME COMING

The leaders of both airlines have engaged in merger talks before, the most recent being in 2008, when Continental walked away at the last minute out of concern for UAL's then-fragile financial position.

Continental and UAL later agreed to link up in a strategic global alliance. The most recent round of talks were completed in about three weeks, a source familiar with discussions said.

Some industry experts believe that one airline merger could spur others and that several different combinations of major airlines are possible. The last major airline merger was in 2008 between Delta Air Lines and Northwest Airlines to form what is currently the world's largest airline.

UAL and US Airways also were in merger talks this year, but US Airways pulled out last month. US Airways CEO Doug Parker, a vocal proponent of airline consolidation, has said that any mergers are good for the industry because they pull capacity out of the bloated system.

"I think it's going to force other carriers to raise the question (of consolidation)," said Hunter Keay, airline analyst at Stifel Nicolaus. He said a merger between US Airways and American Airlines parent AMR makes sense from a "network perspective."

"It certainly raises the question," Keay said. "I don't see it happening in the short-term."