UAL, Continental Said to Approve Merger Forming Biggest Airline



May 3 (Bloomberg) -- United Airlines parent UAL Corp. and Continental Airlines Inc. agreed to merge in a stock swap valued at $3.7 billion that would create the world’s biggest carrier, people with knowledge of the situation said.

The airlines’ boards approved the transaction yesterday, and the deal will be announced today, said the people, who asked not to be identified because the terms aren’t public. The companies’ combined equity value would be about $8.3 billion, one person said.

United and Continental together would take the top spot in global traffic from Delta Air Lines Inc., with hubs in New York and Washington and the most traffic among U.S. carriers on high- fare Atlantic and Pacific routes. The airlines reignited merger talks last month after negotiations collapsed two years ago.

“This is transformational,” said Vicki Bryan, a debt analyst at New York-based Gimme Credit LLC. “This has really been two years in the making. They did all the heavy lifting in 2008.”

Annual cost savings and new revenue from the merger should reach $1 billion to $1.2 billion by 2013, one person briefed on the plans said yesterday.

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 chairman, the people said.

Jean Medina, a spokeswoman for United, and Julie King of Houston-based Continental declined to comment.

Options, Convertibles

The $8.3 billion combined value includes the impact of options and convertible securities, a person with knowledge of the deal said. UAL will swap 1.05 shares for each Continental share, the people said.

Based on April 30 closing prices, UAL had the third-largest market value among U.S. carriers at $3.63 billion, followed by Continental at $3.12 billion. UAL gained 13 cents to $21.60 on the Nasdaq Stock Market on that date, while Continental slid 35 cents to $22.35 on the New York Stock Exchange.

Together, the airlines fly to 370 destinations in 59 countries and plan to continue service to all those points, a person with knowledge of the matter said. United and Continental also are ranked third and fourth in the U.S. by traffic.

Fleet, Hubs

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 are in Chicago, Denver, San Francisco, Los Angeles, Houston, Cleveland and Guam.

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. The deal comes two years after Continental, then led by Larry Kellner, came within hours of approving a merger with United before walking away. Smisek was chief operating officer at the time, and succeeded 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 $86.26 on April 30 on the New York Mercantile Exchange.

Merger discussions restarted last month. After the New York Times reported on April 7 that UAL was negotiating with US Airways Group Inc., Smisek called Tilton two days later and expressed interest in a merger, said a person with knowledge of the matter. Over the next couple of days, they worked out a timeline to exchange financial information and potentially reach a deal by yesterday, this person said.

US Airways

UAL put its talks with US Airways on hold to focus on Continental, prompting US Airways to pull out of those negotiations on April 22.

UAL and Continental soon reached agreement on an “at market” stock swap, in which neither side pays a control premium, the people said. It took until April 27 to work out the exact terms. While Continental argued that the ratio should be set based on the airlines’ stock prices before the April 7 leak, United pushed for a more recent period, the people said.

Smisek and Tilton reached a compromise during an April 27 meeting in Memphis, Tennessee, at a Radisson hotel near the airport, said two people with knowledge of the matter. That was where they agreed to set the ratio for the stock swap, the people said.


737-3,5,7,8,9,900ER CA
The leadership and boards agreed to merge. That is it.

Now we look forward to about 2 years of hard work, about 500 extra lawyers working overtime, about 35 million documents and thousands of meetings with the government. Then we will find out - "yes" or "no".

If we'll get a green light - the downsizing is inevitable and I doubt we will be bigger than Delta. Too much overlap. We already hear statements of more furloughs.
Too many scabs for too long before they retire - it will be as rotten place to work as it is now.
Delta wrote a textbook on how to merge. We are merging not because we'd like to, but because we have to. And if you come to dance late - you bet - you get the ugly girl!

Tilton and others will get their bonuses either way (before they leave for UnitedHealthCare or Bank of America ) and that is what IT IS ALL ABOUT.


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737-3,5,7,8,9,900ER CA
Sorry to hear about furloughs anticipation.
Talking about overlap, do you mean routs or fleet or something else?
Thanks. Both of our airlines already have pilots on furlough. CAL - only 148. United went all the way to 1998 hires - probably around 1200 pilots. And that's people who are ALREADY on the street.

Overlap is in the route map. No way we can keep Europe network from both IAD and EWR. CLE will disappear soon too. CAL spent a lot of efforts in LAX building it up to 60+ departures per day - that will have to be trimmed too since UAL has a hub there.
The trimming already started with CAL joining the Star Alliance.

Don't get me wrong, I am very happy having my dream job. It's just sad to see when the exacs cash out hundreds of millions of dollars without thinking straight about company's future. I guess it is a universal thing .. if they can't be stopped - they will take it.

PS. The oblivious to any industry knowledge or experience marketers [who have been hired to sell the merger to the government and public] who created that website forgot to put both Delta's and UAL's hub and pilot base in Seattle, WA on that map. Also with $31.4 bln Delta has less employees than they indicated - just under 75.000.
Delta is very lean airline with virtually no overlap. They announced 900+ new pilots to be hired in the next 18 months.
Just as the economy recovers we are going into this mess to miss the next wave..
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ORD watcher
It's just sad to see when the exacs cash out hundreds of millions of dollars without thinking straight about company's future. I guess it is a universal thing .. if they can't be stopped - they will take it.
Speaking about devils ... :confused:
Leo F. Mullin spent nearly 30 years rising through leadership positions within several different fields, including banking and transportation, before becoming the chief executive officer of Delta Airlines in 1997. He turned the company's finances around during his first three years as CEO; however, Delta had to struggle along with the rest of the airline industry following the terrorist attacks on the United States in September 2001. Mullin, who held three degrees from Harvard University, became embroiled in controversy when company documents revealed that he and other executives had been paid large sums of money in the form of cash bonuses and payments to pension plans during a time in which the company was asking its employees to accept wage cuts. Mullin stepped down as CEO of Delta at the end of 2003.
I've heard that Mullin still got his "Golden Parachute" of about 30 million USD :confused:
who created that website forgot to put both Delta's and UAL's hub and pilot base in Seattle, WA on that map.
That info is probably outdated already...
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737-3,5,7,8,9,900ER CA
ex-fa, Mullin is a dark page in Delta's history, but he is a Mother Teresa comparing to our own Frank Lorenzo!! The US Congress had to step in to prohibit him from ever running any business :)
The pay, bonuses and golden parachutes are only climbing up. It almost doesn't make any sense to be an executive for longer than 2 years - the retirement bonuses are too large. After 2 years they go somewhere else for the same trick.
People say that pilot pay will never come up to the levels of 80-90's, but they forget that as the pilots took a 50% paycuts the executives took a 900-1200% pay increase. Continental went from 3 Vice Presidents in 1999 to 63 in 2009! :) The amount of money exchanged probably is very close. Good for them, I guess.
The only problem is how much the press gets after the pilots when they demand a fraction of what is channeled into executive's pockets.

That info is probably outdated already...
Not sure I understand what you mean by this.. The hub for both is there, as well as the bases.