3rd UPDATE:Continental,United CEOs See No Barriers To Merger

The heads of UAL Corp. (UAUA) and Continental Airlines Inc. (CAL) said Monday that they hope to complete a merger by year-end that involves no service cuts, compulsory layoffs or labor roadblocks.

The third and fourth-largest U.S. carriers announced a definitive $3 billion merger deal that would see Continental Chairman and Chief Executive Jeff Smisek become CEO of the enlarged entity and executive chairman as early as the end of 2012.

Labor-integration issues and competition concerns have been the main barriers to successful deals in the airline sector, but Smisek was sanguine about antitrust barriers.

Smisek also said synergy targets included no rise in air fares as UAL chairman and CEO Glenn Tilton called the pact "pro-consumer and pro-competition."

The plan outlined Monday contained few surprises after a week of leaks. The airlines, which already have a commercial alliance after failing to reach a merger deal two years ago, also plan to draw management "equitably" from the ranks of both airlines.

Analysts view Continental as having the stronger management team, and Tilton said on a conference call the combined lineup would be decided after a new executive structure had been defined.

The new carrier will be based in United's Chicago headquarters and retain the United name, but it will use the logo and aircraft livery of Houston-based Continental. Smisek will work from both cities.

The merged company would retain all 10 of hubs--including eight in the continental U.S.--and secure an estimated $1 billion to $1.2 billion in synergies, some of which will come from gaining market share. Analysts had expected at least one of the hubs to be shuttered, with Cleveland seen as the most likely target.

The synergies would include $800 million to $900 million in revenue gains from pro forma combined sales of $29 billion last year. The full annual targeted cost synergies of $200 million to $300 million would arrive by 2013, the companies said in a statement.

The merger agreement would see 1.05 UAL shares exchanged for each Continental share, giving United shareholders 55% of the enlarged company. It contains a $175 million break-up fee, according to a regulatory filing.

The two key barriers to the plan will be securing employee agreement and approval from competition authorities on both sides of the Atlantic.

Smisek said on the call he was "confident" of reaching new collective bargaining agreements, though the merger is not contingent on securing fresh pacts by year-end.

Some airline executives who have been through the regulatory wringer are sanguine about the prospects of an enlarged United, despite the more-aggressive noises emanating from the Department of Justice under the Obama administration.

"Any transaction that's being done now wouldn't come close to violating antitrust law." said Doug Parker, chairman and chief executive of US Airways Group Inc. (LCC), in an interview last week.

Continental revived merger talks following renewed discussions between United and US Airways that were widely seen as a means to lure the Houston carrier back to the negotiating table. Parker said last week he was "disappointed" by the leaks of his own talks, which he said did not come from his side.

United and Continental plan to retain two labor representatives on the new company's board but didn't seek approval from powerful pilots' representatives ahead of the pact, a strategy used by Delta Air Lines Inc. (DAL) in its merger planning with Northwest Airlines.

Pilots' leaders from both companies said in a joint statement they would stand "shoulder to shoulder" to support the merger or oppose a pact if it fails to protect members' rights.

Smisek said the combined aircraft fleet would range from 550 to 750 within four years, depending on market conditions. Continental has an all-Boeing mainline fleet, while United also has Airbus aircraft. Tilton said the "utility" of its order for Airbus A350s remained unchanged. Both airlines have orders for 787s from Boeing Co. (BA).

UAL shares were recently trading up 0.5% at $21.70, with Continental up 2 cents $22.37. US Airways was 2.7% higher at $7.26, with American Airlines parent AMR Corp. (AMR) flat at $7.38.

-By Doug Cameron, Dow Jones Newswires; 312-750-4135; doug.cameron@dowjones.com

Expressjet (NYSE:XJT)
Historical Stock Chart
From Jun 2024 to Jul 2024