United, Continental forge world's biggest airline

AFP - Tuesday, May 4

WASHINGTON (AFP) - – United and Continental sealed a three-billion-dollar merger to become the world's biggest airline, in a deal forged to help them navigate strong economic headwinds.

The deal would fuse United's strong Asian presence with Continental's extensive links to Europe and Latin America, a tectonic shift in an industry battling to survive recession.

Airlines around the world are struggling with fallout from the worst recession in a generation, terrorism and costs brought on by an Icelandic volcano which forced the suspension of thousands of flights.

The new airline will fly under the United Airlines name and will hold around seven percent of global airline capacity. It has a market value of around 6.75 billion dollars.

Jeff Smisek, the Continental chief executive who moves to the same position in the new company, said the merger would create "a stronger, more efficient airline, both operationally and financially, better positioned to succeed in a highly competitive global aviation industry."

The companies said they hoped to generate annual savings and new revenues of up to 1.2 billion dollars by 2013.

The deal needs approval from shareholders of the two carriers and US anti-trust authorities, who turned down a United-US Airways deal in 2001.

But Smisek told reporters: "We are confident. There are no material anti-trust concerns. We are increasing competition, we are not reducing competition, with more consumer choice, better consumer choice."

The economic crisis and the rise of low-cost carriers has driven airline alliances and steep cost cutting.

The deal is the latest step to consolidate the US airline sector after Delta's 2008 takeover of Northwest.

British Airways is tying up with with Spanish carrier Iberia to avoid being sidelined by European rivals Air France-KLM and Lufthansa.

United and Continental both had a turnover of more than three billion dollars in 2009 but both reported losses.

"Together, we will have the financial strength necessary to make critical investments to continue to improve our products and services and to achieve and sustain profitability," Smisek argued.

Glenn Tilton, president and chief executive of United parent UAL Corporation, will serve as non-executive chairman of the new United Continental Holdings Inc board until the end of 2012.

He called the deal "a merger of equals to create a world-class and truly global airline with an unparalleled network."

A statement announcing the merger said the boards of both airlines had unanimously approved the deal.

Under the accord, Continental shareholders will receive 1.05 shares of United stock for each Continental share. United shareholders would own approximately 55 percent of the equity in the new company and Continental shareholders 45 percent.

The companies said they expected to complete the transaction by the end of 2010.

The merged giant will maintain United's base in Chicago as its headquarters, while Continental's home city of Houston, Texas will be the number one air hub, the statement said.

Texas Governor Rick Perry clearly thought the headquarters should have been in Houston.

"While we disagree with the decision to locate the headquarters in Chicago, we are encouraged by the company's commitment to Texas and its stated intent to create more jobs for Texans in the future," he said in a statement.

No announcement of job cuts was made, although pilots' unions for both carriers demanded job security and pension guarantees.

United pilots said they would take a "wait-and-see" approach, but believe the format is in place for such a combination to work.

The companies said the new airline will serve more than 144 million passengers per year with 370 destinations in 59 countries.

The combined company promised to offer enhanced service to Asia, Europe, Latin America, Africa and the Middle East from its 10 US hubs.

They said there were no international route overlaps and only "minimal" domestic copying.

US Airways broke off merger talks with United last month, but said it expected consolidation of the fragmented airline sector in the near future.

"It remains our belief that consolidation makes sense in an industry as fragmented as ours," said US Airways chairman Doug Parker.

Few market watchers expected mergers to end with the one announced Monday, and rumors are swirling about a possible American Airlines tie-up with US Airways.