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United Said to Shift Merger Focus to Continental Air

A Continental Airlines jet
A Continental Airlines jet, foreground, is parked near a passing United Airlines jet at O'Hare International Airport in Chicago, on April 16, 2010. Photographer: Tim Boyle/Bloomberg

April 19 (Bloomberg) -- UAL Corp.’s United Airlines has put merger talks with US Airways Group Inc. on hold as it focuses on a tie-up with Continental Airlines Inc., people familiar with the matter said.

United and Continental plan to begin sharing financial information this week, and may reach a decision on whether to merge by the following week, said two of the people, who asked not to be identified because details are private.

Conversations between United and Continental, the third-and fourth-biggest U.S. airlines, began shortly after the April 7 disclosure of the United-US Airways discussions, two people said. Chicago-based United and US Airways started talks in February, a person familiar with the matter has said.

“Given the right terms, United would probably prefer to partner with Continental,” said Matthew Jacob, a New York-based analyst at Majestic Research LLC who doesn’t rate either airline. “Having it be made public that US Airways and United were in talks probably spurred Continental into action.”

A combination of United and Houston-based Continental would surpass Delta Air Lines Inc. as the world’s largest carrier and would have the biggest share of passenger traffic on routes across the Atlantic and Pacific. US Airways is No. 6 among U.S. airlines by traffic.

Spokesmen for United and Continental declined to comment yesterday on any negotiations involving the airlines.

Latest Talks

UAL tumbled $1.17, or 5.1 percent, to $21.66 at 4 p.m. in Nasdaq Stock Market composite trading as most U.S. airlines declined. Continental slid $1, or 4.4 percent, to $21.98 on the New York Stock Exchange, and Tempe, Arizona-based US Airways fell 26 cents to $6.89.

UAL has climbed 68 percent in 2010, while Continental is up 23 percent. UAL and Continental have the U.S. industry’s third-and fourth-highest market values, with UAL at $3.63 billion and Continental at $3.1 billion, based on data compiled by Bloomberg. US Airways was No. 9 at $1.11 billion.

Continental walked away from merger talks with United in April 2008 after directors concluded the risks “outweigh the potential rewards,” the carrier said then. A month later, United’s merger conversations with US Airways fell through. Continental later joined United’s Star Alliance group of airlines, whose members sell seats on each other’s jets.

Travel Rebound

Since then, the U.S. industry has begun to emerge from the travel slump caused by the recession and access to credit has improved. Passenger traffic for the six biggest carriers rose in March for the largest monthly increase since May 2008.

Continental CEO Jeff Smisek, 55, said in March he was open to a tie-up if the carrier needs to “bulk up defensively,” without specifying a potential partner. United CEO Glenn Tilton, 62, has championed mergers since before the airline left bankruptcy protection in February 2006.

A Continental-United tie-up would be a “transformative combination,” Jeff Straebler, fixed-income strategist at RBS Securities Inc. in Stamford, Connecticut, said in an interview last week.

Together they would control 40 percent of Atlantic passenger traffic and 53 percent across the Pacific, where United already leads, based on data compiled by Bloomberg. Passengers on those routes pay some of the industry’s highest fares, because U.S. airlines don’t face discount competitors.

To contact the reporters on this story: Zachary R. Mider in New York at zmider1@bloomberg.net; Mary Jane Credeur in Atlanta at mcredeur@bloomberg.net; Mary Schlangenstein in Dallas at maryc.s@bloomberg.net.

To contact the editors responsible for this story: Jeff St.Onge at jstonge@bloomberg.net; Jamie Butters at jbutters@bloomberg.net.

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