United, Continental approve $3B merger

5/3/2010

CHICAGO - United Airlines and Continental Airlines agreed yesterday to a $3 billion merger that would create the world's biggest airline, according to people briefed on the negotiations.

United's purchase of Continental, to be announced today, would form a coast-to-coast behemoth with a leading presence in the top domestic markets, including New York, Chicago, and Los Angeles.

The merged airline also would gain an extended network to Asia, Latin America, and Europe.

The deal was completed in two weeks and would give the airlines the muscle to fend off low-cost rivals at home and to take on foreign carriers abroad.

The combined company would keep the United name and be based in Chicago. Jeffery Smisek, Continental's chief executive officer, would run the company.

If the deal wins anti-trust approval, the merged airline would replace Delta Air Lines as the top carrier.

The boards of United and Continental met yesterday to approve the all-stock deal, according to people familiar with the companies who spoke on condition of anonymity.

The merger is expected to be completed before the end of the year.

Airlines view consolidation as a way to reduce capacity in an industry that still has too many seats chasing too few passengers. Even with the steep cuts made in the last two years, airlines are losing money.

For much of the last decade they have suffered a succession of powerful blows - from the terrorist attacks of Sept. 11, 2001, to rapidly rising fuel costs and the recession.

Airlines also have been straining to keep up with low-fare competition.

For air travelers, the disappearance of another major carrier could mean less competition on some routes and, potentially, higher fares.

Previous mergers have had a muted effect on ticket prices, especially on routes served by low-fare carriers - Southwest Airlines and JetBlue Airways among them.

"Airlines are struggling to find a business model that makes sense," said Scott Sonenshein, an assistant professor at the Jones Graduate School of Business at Rice University. "Consolidation gives them more leverage. As a consumer, you will have less choices, fewer routes, higher prices, and more fees."

Combined, United and Continental have 21 percent of domestic capacity, in terms of so-called available seat miles, or one seat flown one mile.

Delta has a market share of 20 percent.

Globally, the merged companies would have a 7 percent market share.

The merger would put pressure on American Airlines, which was once the market leader, but which would drop to third place.

The United-Continental deal has some major hurdles to clear.

Completion of the deal requires approval from the Justice Department's anti-trust division, a challenge given the renewed regulatory zeal in Washington.

Analysts expect a lengthier and more complex review of this merger that the six-month study that the Bush administration gave the Delta-Northwest deal.

The merger also is subject to approval of employee unions, whose opposition to mergers in the past has undone many of the proposed deals.

One factor in favor of the deal is that United's pilots' union indicated last month it would not oppose a deal with Continental, whose own pilots have so far remained silent.

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

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

The carrier has 46,000 employees and a mainline fleet of 333 planes made by Airbus and Boeing Co.

Continental, which had $12.6 billion in annual revenue for 2009, has about 41,000 employees and hubs in Cleveland, Houston, and Newark, N.J.