United, Continental Merge to Form Biggest Airline
United Airlines parent UAL Corp. and Continental Airlines Inc. agreed to merge in a stock swap valued at more than $3.2 billion to create the world’s largest carrier, reviving a deal that fell apart two years ago.
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 nonexecutive 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., and operate hubs in New York and Washington. Negotiations resumed last month after Continental pulled out of talks in April 2008 as fuel prices rose and the recession deepened.
“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.
Tilton said he told UAL’s board: “Right deal, right time.”
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 set up to share merger information.
“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, which will have $1.2 billion in one-time merger-related costs spread over three years.
Based on UAL’s closing price, the deal values Houston-based Continental at about $3.24 billion, according to data compiled by Bloomberg. The companies’ combined value as of today was about $6.9 billion, with UAL and Continental ranking third and fourth among U.S. carriers.
UAL rose 51 cents, or 2.4 percent, to $22.11 at 4 p.m. in New York on the Nasdaq Stock Market, while Continental also gained 51 cents, or 2.3 percent, to $22.86 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 as well as 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.
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.
While Smisek and Tilton said the carrier’s route systems have minimal overlap, the combined airline may be required by U.S. regulators to yield some takeoff and landing slots at airports like Liberty in Newark, New Jersey, where total flights are capped.
Business travelers will have access to hub airports in the four largest U.S. cities and more seamless travel to international destinations, said Douglas Runte, managing director at New York-based Piper Jaffray & Co. Some fares likely will rise, he said.
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.
United and Continental also must negotiate joint contracts with their unions, which called on the airlines today to provide pay, benefit and work rule improvements and possible equity stakes in the new company.
“I see risks in front of us and I see opportunities in front of us,” Jay Pierce, chairman of the Air Line Pilots Association at Continental, said in an interview. “When a group of people are willing to accept risk, there should be a reward for that.”
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.”
Seven analysts recommend buying Continental shares, and one advises selling, according to data compiled by Bloomberg. Five analysts recommend buying UAL, one recommends holding and one selling.
JPMorgan Chase & Co.’s J.P. Morgan Securities Inc. and Goldman Sachs Group Inc. acted as financial advisers for United, with Cravath, Swaine & Moore 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, Gimme Credit’s Bryan said. Crude traded at $86.19 today on the New York Mercantile Exchange.
“This was something that’s always been in the best interest of both companies,” Smisek said today in the interview. “But the time was not right, the opportunity was not there.”
U.S. air traffic has begun to rebound as the recession eases, giving airlines the chance to push up fares they slashed to lure vacationers when corporate travel waned.
“The two years’ experience has been good for both companies to see opportunities we previously hadn’t imagined were there,” Tilton said today on a conference call with analysts and investors.
United initially revived talks with US Airways Group Inc., a reprise of those two carriers’ discussions from 2008 after Continental backed out. The US Airways conversations stayed under wraps until an April 7 New York Times report. Tilton said Smisek reached out two days later.
“I saw the news release go by that my best partner for the future potentially was marrying somebody else,” Smisek said in the interview. “I called Glenn and said I was a much prettier girl.”