Continental CEO Smisek Defends Proposed United Merger in Lawsuit on Tie-Up

Continental Airlines Inc. Chief Executive Officer Jeff Smisek defended a proposed merger with UAL Corp., testifying in federal court that combining the airlines will “increase our revenue and decrease our costs.”

UAL Chief Executive Officer Glenn Tilton also testified today in response to a lawsuit filed to block the merger, saying the industry is experiencing “serial bankruptcies.”

Since the Sept. 11, 2001, terrorist attacks, “Continental is the only company that has grown, to the best of my knowledge,” other than low-cost carriers, Tilton said at the San Francisco hearing. “All of the others have contracted.”

The airlines were sued in June over claims their proposed merger would create a monopoly, increasing fares and costing jobs. United and Continental received regulatory approval last week to combine under an all-stock deal announced May 3. The new company would surpass Delta Air Lines Inc. as the world’s biggest airline and mesh United’s Pacific routes with Continental’s service in Latin America and over the Atlantic.

Joseph Alioto, a lawyer representing consumers in the suit, today showed Smisek internal Continental “Hub Stats” documents projecting “optimized” flight networks for the merged airline in various cities. For Denver, the document showed a reduction of 37 departures, a 19 percent cut.

‘Best Guess’

Alioto and U.S. District Judge Richard Seeborg asked Smisek to explain the documents detailing information for Denver, San Francisco, Cleveland, Newark, New Jersey, and other cities -- all except one showing a decrease in departures. Smisek said they were prepared by Continental’s “network group,” which “put together their best guess given the limited information we have.”

The documents were used “to get an idea of what the combined network would look like” to evaluate the merger, Smisek said. The data from the documents is “insufficient” to make concrete decisions, because it relies on projections and not actual information from United, Smisek said.

“I hope we will keep all our hubs open but I can’t guarantee that,” Smisek said in court. “I don’t know what we’ll do because we haven’t done the optimization.”

Nonstop Flights

Smisek acknowledged, after repeated questioning from Alioto, that the merged airline would be the only choice for consumers seeking to fly nonstop between some airports, including Denver International and Newark Liberty. However, he said, rivals offer similar routes and maintain competitive pricing by flying to John F. Kennedy in New York, for example, instead of Newark.

Under questioning of Tim J. Coleman, a lawyer for the airlines, Smisek said the two airlines each have approximately 3,000 employees at their respective headquarters. The merger will result in 1,500 to 1,800 of those employees losing their jobs, he said.

Elimination of “front-line” employees, meaning workers such as airline attendants, reservation agents and pilots, will be “very modest indeed,” Smisek said. The combined airline expects to be “hiring back people we had to furlough” as a result of the terrorist attacks of Sept. 11, 2001, Smisek told the court.

Before the testimony began today, Alioto told Seeborg he can demonstrate that the merger may reduce competition, the requirement needed to block the deal. The merger will create monopolies in seven city-to-city nonstop routes, including San Francisco to Newark and Houston, and Denver to Newark and Cleveland, Alioto said.

Justice Department Announcement

The Justice Department’s announcement of its approval of the merger is “directed, of course, at you,” in an attempt to influence the judge to reject the legal challenge to the merger, Alioto told Seeborg.

Seeborg said he “wouldn’t presume” the Justice Department’s action was intended to coincide with the hearing. Maybe it’s “fairly clear-cut in their view, and they could act promptly” on the approval, Seeborg told the lawyer.

Katherine B. Forrest, a lawyer representing Houston-based Continental and Chicago-based United, said past antitrust decisions by the U.S. Supreme Court cited by Alioto don’t apply to this case.

“A reasoned, economically supported position” in the case is that U.S. airlines face a “fiercely competitive industry with very easy entry,” Forrest told the judge.

The case is Malaney v. UAL Corp., 10-2858, U.S. District Court, Northern District of California (San Francisco).

To contact the reporter on this story: Joel Rosenblatt in San Francisco at jrosenblatt@bloomberg.net.

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