United, Continental announce plan to combine to form world’s largest carrier

United, Continental agree to combine in $3B deal

United and Continental Airlines said Monday they have agreed to form the world’s largest airline in a deal worth about $3 billion.

The new airline would jump past Delta Air Lines in size and have flights reaching from Shanghai to South America. That should lure more business travelers, who pay higher fares. The United name will live on, although the planes will have the Continental colors and logo.

The airline will be run by current Continental CEO Jeffery Smisek. United CEO Glenn Tilton, a longtime advocate of consolidation in the airline industry, will be chairman for up to two years, with Smisek taking over as chairman after that.

The deal will first need approval from shareholders and antitrust regulators. It’s expected to close in the fourth quarter.

The new parent company will be United Continental Holdings Inc. It will be based in United’s hometown of Chicago and its biggest hub will be Houston. The companies say the combined airline will have revenue of about $29 billion and $7.4 billion in unrestricted cash.

The companies said combining would save them $1 billion to $1.2 billion a year by 2013. That includes between $800 million and $900 million of new annual revenue, partly from increased international service.

Wall Street has pushed consolidation as a way to let airlines raise fares by reducing the number of flights and seats. Smisek told The Associated Press on Monday that the companies don’t assume they can boost prices, but that with a bigger network they can attract more high-paying corporate travelers.

Two years ago, Continental walked away from a deal with United at the last moment. Smisek said times have changed since 2008, when both airlines were low on cash and facing record fuel costs.

“Both carriers are performing better than they have been for the past couple of years,” he said. “The economy is on an upswing. Fuel prices, although high, are manageable.”

Owners of United parent UAL Corp. will hold 55 percent of the combined company, with Continental Airlines Inc. shareholders owning the rest. Continental shareholders will get 1.05 UAL shares in exchange for each Continental share.

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

The combination will test the notion that the money-losing industry can work better on a large scale. Corporate travelers prefer a wide choice of departure times and a worldwide network. The new airline will offer them that.

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, compared with 12 overlaps in the Delta-Northwest deal, according to J.P. Morgan analyst Jamie Baker. 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.

As for keeping the United name, Tilton told the AP, “The benefit obviously of United Airlines is familiarity in the Pacific and international markets, where it has been a presence longer than Continental.”

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.

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. Smisek plans to keep offices in both Houston and Chicago.

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.”