United, Continental Merger; Capacity Cuts

Chandrasekhar Atreya
03 May, 2010
New York City

UAL Corp, the parent of United Air and Continental agreed to merge that will create the largest domestic carrier with market share of 21%. The deal is expected to cut capacity on many routes that will increase fares. The deal faces many hurdles but is expected to be complete by the end of the year.

[R]11:45 AM Chicago – UAL Ltd, the parent of United Air and Continental agreed to merge that will create the largest domestic carrier with market share of 21%. The deal is expected to cut capacity on many routes that will increase fares. The deal faces many hurdles but is expected to be complete by the end of the year.[/R]

United Airlines and Continental Airlines announced an all-stock $3 billion merger that would create the world’s largest airline by customer traffic.

Only two years ago, Continental was discussing the purchase of UAL when oil prices hovered near $152 a barrel and United reported huge losses.

The newly merged airlines will have 21% of domestic traffic followed by 20% market share held by Delta Air Lines Inc and American Airlines will drop to the third largest carrier.

The talks between UAL and Continental gained momentum after UAL initiated talks with U.S. Air. Analysts had predicted that talk with U.S. Air was meant to lure Continental to the negotiating table. But, once the discussion started the deal was completed swiftly in less than two weeks.

Only two years ago Continental was looking to acquire UAL but talks fell apart after oil prices reached all time record and UAL reported large losses in 2008.

United Continental Holdings Inc, as the newly merged carrier will be called will control 7% of worldwide traffic and have hubs in New York, Chicago, Los Angeles and wider network in South America, Europe and Asia including direct flights to several cities in China.

The boards of the two airlines met last Sunday to approve the all-stock deal. The UAL Corporation, the parent company of United Airlines will issue 1.05 shares for each continental share valuing the acquisition at $3.17 billion based on Friday’s closing price.

United shareholders will control 55% of the combined airline and the rest by Continental shareholders. The merger of two airlines is expected to save approximately $1 billion to $1.2 billion in costs and will operate route network of 370 cities in 59 countries.

The deal is expected to trim capacity in the industry and potentially increase fares in the near term after the merger is completed by the end of the year. Both airlines are predicting at least for now that fares will not increase, but industry experts predict lower capacity on many routes will aid higher fares.

The combined company will keep the United name and headquartered in Chicago and Continental logo. The airline will also have a large presence in Continental’s Houston hub.

Jeffrey A. Smisek the CEO of Continental will be appointed as chief executive of the merged entity and Glenn Tilton, current chief executive of UAL will remain as non-executive chairman for the next two years.

The Justice Department’s antitrust division has to approve the merger which may take longer than six months when the last merger was approved between Northwest and Delta.

The merger also needs the backing of the two employee unions who have opposed other mergers in the past. Both carriers being members of the Star Alliance have cooperated on foreign routes and already have the antitrust immunity on trans-Atlantic flights.

UAL pilots union has already agreed to the deal but Continental union has still not announced its view on the deal.

UAL ((UAUA)) and Continental ((CAL)) in New York trading gained 2% higher.