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United Airlines
parent UAL Corp. will buy Continental Airlines Inc. for $3.17 billion
to form the world’s largest carrier, to withthstand the hazards that
have battered airlines in recent years.

The Deals

The merger, if
approved by regulators, would create a sprawling global airline
designed to lure more well-heeled business travelers.The combined
carrier, with over $29 billion in annual revenues, would carry the
name, United Airlines, and be based in Chicago. The deal, announced by
the companies on Monday, is expected to produce $1 billion to $1.2
billion in annual revenue and cost benefits by 2013. “It’s really a
classic end-to-end kind of merger where both companies benefit from the
transaction,” said Michael Derchin, principal at CRT Capital Group. The
deal is the first major U.S. airline merger since Delta Air Lines’ 2008
purchase of Northwest, after months of speculation that more industry
consolidation was ahead. However, the merger, while transformative for
the two airlines involved, promises little, if any, capacity cuts that
might bolster ticket prices for the industry, which struggles with
overcapacity, low-fare competition, and volatile fuel prices. And
experts say the deal probably will not inspire similar mergers among
the remaining hub-and-spoke carriers.

United and
Continental said their merger would expand service with minimal
domestic and no international route overlap. The combined company will
have 10 hubs, with Houston as its largest, and a workforce of nearly
90,000. Shares of UAL were down 0.6 percent at $21.47 on Nasdaq.
Continental shares were off 1.3 percent at $22.06 on the New York Stock
Exchange.

All- Stock Deal

According to the
terms of the deal, Continental shareholders will receive 1.05 shares of
United common stock for each Continental common share they own. Based
on United’s closing price of $21.60 on Friday, and Continental’s 139.6
million outstanding shares as of April 21, United would pay $3.17
billion for Continental, or $22.68 a share. That represents a 1.5
percent premium over Continental’s closing price on Friday. Based on
current shares outstanding, the combined company would have 314.5
million shares, and UAL shareholders will own roughly 55 percent.
Continental Chief Executive, Jeff Smisek, will be CEO of the new
holding company, which will be called United Continental Holdings Inc.
UAL CEO, Glenn Tilton, will be non-executive chairman. Smisek, 55, will
become executive chairman when Tilton steps aside, expected two years
after the merger closes. One-time merger costs of about $1.2 billion
are expected over a three-year period. The companies said they expect
to receive government approval and complete the transaction by the end
of 2010. “We do not believe there are any material anti-trust
concerns,” Smisek said. “We have a high degree of confidence that this
transaction will close.”

No Big Job Cuts Planned

Tilton said in a
message to employees on Monday that “some reductions in the salaried
and management workforce” for both companies would result. But Smisek
told Reuters in an interview that rank-and-file employees would see
little impact on their numbers.

“To the extent
there are some degree of overlaps at airports where we can achieve some
efficiencies, we would anticipate handling those in the interim through
normal attrition, retirement and voluntary programs,” he said.

The Air Line Pilots
Association, which represents pilots at both UAL and Continental, has
indicated its tentative support for the deal. In a statement on Monday,
the UAL ALPA chapter said support from the pilots is “pivotal” to the
merger’s success. The International Association of Machinists and
Aerospace Workers said in a statement that it was concerned about the
effect of the merger on benefits and job security of its more than
26,000 members at both carriers. Both ALPA and IAM have seats on UAL’s
board of directors.

“The major issue is
going to be whether labour supports the deal, and I think they will
because I think they’ll see that the combined company is going to be
much more profitable than either one individually is as a stand-alone,
and they’ll view that as a way of recouping some of their lost wages
more quickly,” CRT’s Derchin said.Consolidation OutlookUAL previously
was in talks with US Airways Group. It was those talks that prompted
Continental to enter discussions with UAL.

“When I saw in the
newspaper that they were talking to another company – and since they
are the best partner for Continental – I gave Glenn a call and we began
our talks,” Smisek said.

Now, analysts are speculating on other merger prospects. “It leaves
(AMR Corp’s) American Airlines really out of the gold, and that’s kind
of funny in light of the fact that not too long ago, they were the
largest of the legacy carriers,” said airline consultant, Doug Abbey.
Morningstar equity analyst, Basili Alukos,s said AMR might be a good
match for JetBlue Airways. The companies recently announced a
code-share partnership. “I would imagine that’s a first step toward a
merger,” Alukos said.