United in merger talks with Continental

United in merger talks with Continental
By Doug Cameron in Chicago and James Politi in New York
Copyright The Financial Times Limited 2006
Published: December 13 2006 06:15 | Last updated: December 13 2006 12:50



United Airlines is pursuing exploratory merger talks with Continental Airlines, the FT has learned, amid what one executive called “a feeding frenzy” of potential consolidation among US carriers.

Glenn Tilton, United’s chairman and chief executive, has been the most outspoken proponent of the need for deals to aid the recovery of the domestic industry, a process fired into life by US Airways’ unsolicited bid for Delta Air Lines.

United and Continental are also looking at alternative tie-ups, according to people with knowledge of the discussions, but a combination of the second and fourth-largest US carriers has long been viewed as the most complementary in terms of their route networks, fleet and cost structures.

Continental recently overtook Northwest Airlines as the fourth-largest US carrier by revenue, and a combination with United would create a group with pro forma sales of $32.7bn, making it by far the largest airline in the world.

However, people close to the discussions stressed that no deal is imminent amid a merry-go-round of talks between all of the major carriers. “Everybody is doing something at the last moment,” said one executive.

US Airways’ surprise move for Delta has forced executives at rival carriers to re-examine the competitive and regulatory landscape in the US, six years after antitrust officials blocked a potential round of deals between the six remaining network airlines, including United’s bid for US Airways and American Airline’s approach to Northwest.

The $8.8bn offer to Delta’s creditors – the airline filed for bankruptcy protection in September 2005 – could attract as many as three counter-offers, according to industry financiers, with United, Northwest and Continental all seen as potential candidates.

The potential deal-making has also extended to the low-cost sector, with AirTran launching a hostile $290m offer on Wednesday for Milwaukeee-based Midwest Air, which operates business class-focused services throughout the central US.

Officials at the major carriers declined to comment on the manoeuvring, though all remain cautious about the chances of completing any of the proposed transactions because of the complexities which have dogged US airline mergers for decades.

The strong voice of labour in the highly-specialised and unionised US airline industry is still viewed as the major barrier to near-term consolidation. Delta’s pilots will hold a rally on Wednesday to voice their opposition to the US Airways’ bid, backed by senior Congressional figures.

Continental and American are the only two major carriers to avoid a spell in bankruptcy protection during the current industry downturn.

Any deal involving the two Texas-based carriers would heighten tensions with staff after years of costs cuts to maintain competitiveness with rivals which have used the bankruptcy process to restructure.

Larry Kellner, Continental’s chairman and chief executive, has made it clear in recent weeks that he would prefer an independent future for the Houston-based carrier, but that he is also aware that an evolving industry landscape could leave it vulnerable to the emergence of new, larger rivals.

United emerged from more than three years of bankruptcy protection last February, but analysts still believe it still has to cut more costs to remain competitive. The carrier has successfully pursued a focus on premium passengers – a strategy shared with Continental – but remains dogged by a simmering dispute with pilots unhappy at a management compensation scheme.

John Prater, a Continental captain who will take over as president of the Air Line Pilots Association in January, has also signalled a more activist approach by labour, which could impact any merger plans.

“After five years of concessionary bargaining, lost pensions, and battered work rules, our pilots are primed to take offensive action,” he said following his election in October over an incumbent seen by analysts as more moderate. “This may mean a return to the hard-nosed tactics of earlier years and a grassroots mobilisation of each and every one of our members.”