United-Continental merger would land in Chicago - Merger talks moving rapidly; US Airways ends discussions with United

United-Continental merger would land in Chicago - Merger talks moving rapidly; US Airways ends discussions with United
By Julie Johnsson
Copyright © 2010, Chicago Tribune
10:22 p.m. CDT, April 22, 2010
http://www.chicagotribune.com/business/ct-biz-0423-united-usairways--20100422,0,396744,full.story


Chicago would be headquarters to the largest airline in the world if United Airlines successfully consummates a deal with Continental Airlines.

Where to base the world headquarters of the merged entity is one of many potentially thorny "social" issues that have been resolved as the two airlines move rapidly toward a deal that could be completed as soon as next week, said people close to the situation.

Continental on Thursday cemented its status as the front-runner to be United's merger partner when US Airways formally ended talks with Chicago-based United.

Continental CEO Jeff Smisek would be named chief executive of the new carrier, while United CEO Glenn Tilton would move to its board, likely as non-executive chairman, sources said.

Both sides agree that it makes sense to base the new carrier in a major financial center like Chicago, said a person familiar with discussions. However, Continental's home city of Houston would continue to serve as a major operational base for the new company.

The two airlines declined to comment.

The deal under negotiation would be a straight stock swap, with no market premium, Bloomberg News reported Thursday.

The market appears to have anticipated that possibility, with United and Continental stocks trading in tandem in recent days. United stock closed at $21.71 Thursday, up 28 cents; Continental's shares were priced at $21.43, down 3 cents. Combined, the two airlines would have a market capitalization of $6.6 billion.

Although a merger appears likely, it is far from certain, sources cautioned. Continental walked away from a deal with United on the eve of an announcement in 2008.

US Airways' announcement Thursday that it would no longer continue merger talks with United could remove some of the urgency from the Continental-United discussions, which have progressed at a feverish pitch for the past week.

Continental's board had favored a gradual integration of the carriers, which are already sharing some non-critical operational functions, said a person close to the carrier. Directors could decide to take additional time to study Continental's competitive options now that US Airways is out of the picture.

"Before today, I would have said there was a 100 percent chance of a United merger, if not with Continental, then with US Airways," said Roger King, airline analyst with CreditSights Inc. "Now, there's maybe an 80 percent chance."

Saying it wanted to respond to the merger speculation that had been swirling for weeks, US Airways said Thursday that its board had decided to not to pursue talks with United that had faltered once Continental entered the picture.

US Airways executives were furious to find themselves jilted after pouring time and money into a potential deal with United, said a source close to the carrier.

In unusual public statements about private discussions, US Airways CEO Doug Parker said that talks with United had taken place for several months, but that he was confident the nation's sixth-largest carrier could go it alone.

"I am sure some ‘industry experts' will suggest that US Airways will be strategically harmed if United now chooses to merge with Continental," Parker said in a letter Thursday to US Airways employees. "They will be wrong. … Should our competitors choose to merge and help create a more stable airline industry, our independent airline will only become stronger."

The rupture between United and US Airways doesn't rule out a return to the negotiating table if the United-Continental talks falter, sources said.

US Airways is also viewed as a potential partner for American Airlines, although American CEO Gerard Arpey told analysts Wednesday that American is "not necessarily threatened by talk of consolidation in the industry."

Continental had been hesitant to get drawn into potentially distracting merger discussions, preferring instead to focus on the joint ventures it was forming to share flying with United over the Atlantic and Pacific, sources said.

But not wanting to be left a distant fourth if United joined with US Airways, Continental decided last week to resume talks with United, which it had abandoned two years ago, sources said.

Analysts consider Continental to be the preferred merger partner for United. The tie-up would create the world's largest airline and is more likely to be blessed by antitrust regulators, given the relatively light overlap in the airlines' networks.

United and Continental's pilots unions have been working together for more than two years, anticipating the airlines would eventually merge, sources said.

"Historically, airline mergers have not worked because managements never really solve the labor problem in advance of the merger," said airline analyst Julius Maldutis. "United-Continental, I believe, will have the various labor groups approving the merger, and it will be a great success story."

jjohnsson@tribune.com