4th UPDATE: Continental, United CEOs See No Merger Barriers
May 03 2010 - 11:52AM
Dow Jones News
The heads of United Airlines parent 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 by traffic announced
a definitive $3.2 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 to creating the world's
largest airline by revenue and the leading member of the global
Star alliance.
Smisek, speaking on a conference call, 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 the same call the combined lineup would be
decided after a new executive structure had been defined.
The carriers expect layoffs at their respective headquarters,
but pledged to rehire affected staff where possible.
Synergies Assume Share Gains
The new carrier would be based in United's Chicago headquarters
and retain the United Airlines' 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 the partners'
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 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 remain 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.
DoJ, Labor Key To Completion
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
this year 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).
Smisek said at a New York press conference that a fuel efficient
fleet would be the "best hedge" against rising oil prices for the
new airline.
UAL shares were recently trading up 1.1% at $21.84, with
Continental up 0.6% at $22.38. US Airways was 3.5% higher at $7.32,
with American Airlines parent AMR Corp. (AMR) up 1.8% at $7.51.
-By Doug Cameron, Dow Jones Newswires; 312-750-4135;
doug.cameron@dowjones.com
(Brendan Conway and Anjali Cordeiro contributed to this
article.)
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