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The Honolulu Advertiser
Posted on: Friday, April 16, 2010

Continental, United revisit merger

By Julie Johnsson
Chicago Tribune

Hawaii news photo - The Honolulu Advertiser

Continental Airlines has once more expressed interest in merging with United Airlines, according to sources familiar with the talks. The move comes after United and US Airways were said to be in discussion for a possible merger.

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CHICAGO Continental Airlines is in serious merger discussions with United Airlines, picking up from talks that were suspended two years ago at the direction of the Houston-based carrier's board, said people with direct knowledge of the talks.

Continental was drawn back to the merger table after learning last week through news reports that Chicago-based United was courting Arizona-based US Airways, said a person close to the talks.

United's negotiations with both carriers are expected to progress rapidly, and it is likely to make its decision within 30 days, said a person familiar with the talks.

Representatives for the carriers declined to comment.

The "social" issues that thwarted a United-Continental deal in 2008 still must be resolved and again could cause an agreement to unravel, sources warned. United is expected to insist on keeping its headquarters in downtown Chicago, where it is building a new operations center with $35.8 million in city assistance. Other points of contention: the makeup of the management team and the surviving brand.

The carriers have ample reason to move quickly, analysts said. Airlines are enjoying a rare burst of prosperity as the global economy recovers. After a decade of crises in which U.S. airlines lost $70 billion, adjusted for inflation, observers fret the next calamity or oil shock may be right around the corner.

"With the price of oil high and the recovery under way, there is a sense of urgency," said Bill Swelbar, a Massachusetts Institute of Technology airline researcher. "It needs to be done, and done now."

Analysts consider Continental a better fit for United since their combination would form the world's largest airline, with relatively little overlap in their networks to draw scrutiny from antitrust regulators.

The two carriers also stand a greater chance of quickly and peacefully merging their unions, which would enable executives to focus on nonlabor cost cuts. In anticipation of a merger, United and Continental pilot union leaders have laid the groundwork for integrating their work forces, sources said.

Wendy Morse, president of United's powerful pilots union, said yesterday that Continental "represents a more logical merger partner" than US Airways, whose pilots and flight attendants remain deeply divided five years after it merged with America West Airlines.

"We have been down this path before, and we have a long-standing working relationship with the pilots of Continental," Morse said. "We would parlay this relationship to help make a merger between United and Continental viable for both pilot groups, as well as toward the success of the combined operations."

But US Airways and United also could make a compelling case for a tie-up that would create the world's second-largest carrier. Although the carriers likely would be required to divest holdings in such markets as Washington, D.C., Philadelphia and Las Vegas, where they have a concentration of resources, they still would form a larger domestic network than would a United-Continental combination, said airline analyst Vaughn Cordle, a retired United pilot.

Continental can't risk being left on the sidelines while its Star Alliance partners United and US Airways merge, leaving it a distant fourth in the U.S. market with few options for growth, said analyst Hunter Keay of investment bank Stifel Nicolaus.

"A Continental bid for United is not just an offensive play, but defensive as well," Keay added.