AP Source: Continental and United to Combine

By: JOSHUA FREED AP Email
By: JOSHUA FREED AP Email

MINNEAPOLIS (AP) - Directors at Continental and United airlines have approved a deal that would combine them into the world's largest airline, a source with knowledge of the situation said on Sunday.

The stock-swap deal values Continental at some $3.2 billion.

The Sunday board actions were described by a person with knowledge of the votes, who declined to be identified because the
companies plan an announcement on Monday.

Combining Continental and United would leave the U.S. with three big international airlines - the new United, Delta, and American. US Airways Group Inc. also flies internationally, but its 2009 international traffic was less than one-third the size of American's.

The combined airline will be called United, based in United's hometown of Chicago, and run by Continental CEO Jeffery Smisek. United CEO Glenn Tilton will be chairman.

United, a unit of UAL Corp., is the nation's third-largest carrier by traffic. Continental Airlines Inc., in Houston, is the country's fourth biggest.

Any deal would need the approval of antitrust regulators. The Justice Department approved Delta Air Lines Inc.'s purchase of Northwest in 2008, which turned Delta into the world's biggest carrier.

Another key issue in putting the two airlines together will be integrating the pilot workforce.

A union hot line message to United pilots on Sunday said the "union remains engaged in this issue, and if a merger is announced by United and Continental," union officials "are fully prepared to protect and defend the interests of all United pilots."

Continental and United both trace their roots to air services founded by Walter Varney in the 1920s and 30s.

One of United's main attractions is its Pacific routes, which it bought from Pan-Am in 1985. It was already the biggest carrier in the U.S., and the Pan-Am deal made it a major international carrier for the first time. Northwest's Pacific routes were one reason Delta pursued that deal two years ago.

Continental jumped in size in 1987 by swallowing Frontier, People Express and New York Air.

Both airlines shrank to cope with the recession. United cut capacity 7.4 percent last year, and Continental shrank 5.2 percent.

And they've both been losing money. Continental reported a 2009 loss of $282 million as revenue plunged 17.4 percent to $12.59 billion. UAL lost $651 million for the year as revenue fell 19.1 percent to $16.34 billion.

The market capitalization for UAL Corp. on Friday was $3.62 billion, while Continental's was $3.12 billion.

Just two years ago, American Airlines was the nation's biggest carrier. First Delta surpassed it, and now United might. More than pride is at stake. Corporate travelers gravitate toward airlines with the most routes.

On April 8, when there was talk that United and US Airways were discussing a deal, American CEO Gerard Arpey said the company was
"not in any way threatened" by the merger talk involving other carriers.

"We think we're in a very good position irrespective of what may happen," he said at the time.


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