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United, Continental to Merge, Forming Biggest Airline

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United, Continental to Merge, Forming Biggest Airline

Unread post by bimjim » Mon May 03, 2010

http://www.bloomberg.com/apps/news?pid= ... 7yb.yhoUz0

United, Continental to Merge, Forming Biggest Airline
By Mary Jane Credeur and Mary Schlangenstein
May 3 (Bloomberg)

United Airlines parent UAL Corp. and Continental Airlines Inc. agreed to merge in a stock swap valued at more than $3 billion that will create the world’s biggest carrier by passenger traffic.

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 non- executive chairman, the companies said today in a statement. Each Continental share will be exchanged for 1.05 UAL shares.

United and Continental together would take the top spot in global traffic from Delta Air Lines Inc., with hubs in New York and Washington and the most traffic among U.S. carriers on high- fare Atlantic and Pacific routes. The airlines reignited merger talks last month after negotiations collapsed two years ago.

“With the recovery of the economy, fuel prices moderating, capital markets opening and both companies having solid liquidity, it was the right time to get involved in merger discussions,” Smisek said today in an interview.

Annual cost savings and new revenue from the tie-up should reach $1 billion to $1.2 billion by 2013, the airlines said. The transaction requires approval by shareholders and regulators.

Existing travel reservations won’t be affected, and customers won’t see any operational changes until after the deal closes near the end of this year, the companies said on a website dedicated to the merger.

Workforce Impact

“We expect minimal impact to our front-line employees, with any reductions coming principally through retirement, attrition and voluntary programs,” Tilton told United workers in a message today. There will be “some reductions” in the salaried and management workforce at both airlines, he said.

UAL shareholders will own 55 percent of the combined company.

Based on UAL’s April 30 closing price, the deal values Continental at about $3.17 billion, according to data compiled by Bloomberg. The companies’ combined value as of that date was about $6.8 billion, with UAL and Continental ranking third and fourth among U.S. carriers.

UAL gained 13 cents to $21.60 on the Nasdaq Stock Market on April 30, while Continental slid 35 cents to $22.35 on the New York Stock Exchange.

In addition to Smisek and Tilton, the merged airline’s 16-member board will include 6 directors from each carrier and 2 union representatives. The airlines said Tilton’s position as non-executive chairman will run through Dec. 31, 2012, or the second anniversary of the deal’s closing, whichever is later.

Name, Livery

The parent company will be named United Continental Holdings Inc. The airline will operate under the United name, and aircraft will have the Continental logo and colors, the companies said.

“This is what happens in a merger of equals,” Smisek said. “You take the best of both companies and carry them forward. The United name is very well recognized internationally, Continental’s logo is symbolic of great culture and service.”

Together, the airlines fly to 370 destinations in 59 countries and plan to continue service to all those points. United and Continental are now ranked third and fourth in the U.S. by traffic, behind Delta and AMR Corp.’s American Airlines.

The carriers’ frequent-flier programs will be combined, and members’ miles will be put into one account when the merger closes, United told customers in an e-mail. Before then, each program will continue and the points can be used under existing rules.

Combined Revenue

United and Continental had almost $29 billion in combined revenue last year. Their main jet fleets total 700 aircraft, and they now employ more than 88,000 workers. Besides Washington and New Jersey’s Newark airport, their other hubs include Chicago, Denver, San Francisco, Los Angeles, Houston, Cleveland and Guam.

“This is transformational,” Vicki Bryan, a debt analyst at New York-based Gimme Credit LLC, said in an interview before the announcement. “This has really been two years in the making. They did all the heavy lifting in 2008.”

JPMorgan Chase & Co.’s J.P. Morgan Securities Inc. and Goldman, Sachs & Co. acted as financial advisers for United, with Cravath, Swaine & Mopore LLP providing legal advice. Lazard Ltd. and Morgan Stanley advised Continental, with Jones Day, Vinson & Elkins LLP and Freshfields Bruckhaus Deringer LLP providing legal counsel.

Delta vaulted to the top of the worldwide industry by traffic after buying Northwest Airlines Corp. in 2008, spurring talks on consolidation across the U.S. industry. At the time, Continental came within hours of approving a merger with United before walking away. Smisek was chief operating officer then, and succeeded Larry Kellner as CEO in January.

Those talks collapsed because “it was a more risky environment at that time” when oil prices exceeded $120 a barrel and economic growth was slowing, Bryan said. Crude traded at $86.26 on April 30 on the New York Mercantile Exchange.

In an interview today, Tilton said he told UAL’s board: “Right deal, right time.”

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