Merger in the Air: Continental and United Tie Up

It is now official. After looking for a major tie-up for a while, United Airlines has announced a ‘virtual merger’ with Continental Airlines. The two carriers are banking on the merger to give them a way out of the problems arising from rising cost, according to a release issued by them Thursday.

As per the terms of the merger, the two airlines would complement each other on matters related to fares, flights, and also other services they offered customers. Continental also announced it would no longer be a part of the SkyTeam Alliance; instead, it would now be a part of the Star Alliance.

What this effectively means is that it would now partner with United and withdraw from the membership it shared with Northwest and Delta, and also Air France-KLM when it was part of the SkyTeam Alliance.

In a message issued to employees at United, CEO Glen Tilton said, “We announce a new partnership with Continental Airlines that will redefine the industry by going forward in a way that is beneficial for our airlines, employees, shareholders, customers, and the communities we serve.”

Both companies would benefit immensely from the merger. Not only would it help them to fight the current problems arising out of the increasing fuel prices, it would also enable them to be strong and effective competition to other carriers at a global level.

Analysts have reacted positively to the merger, with Calyon Securities’ airline analyst Ray Neidl saying it made sense as the two carriers had complementary route systems. According to Robert Mann, president of R.W. Mann & Co., an aviation consulting firm, “Importantly, this gets them an even more attractive end-to-end global network.”

Issuing a statement about the merger, Continental’s chairman and CEO Larry Kellner said, “In a network business, there is significant value gained from linking with larger networks to provide truly national coverage and expanded global reach , and exploring new ways to reduce costs and improve efficiencies.”

Elaborating further, he said, “As we experienced some of the most challenging conditions airlines have ever faced, we look forward to the benefits of a new relationship with United and other Star Alliance3 members.”

United and Continental plan to develop extensive cooperation in different areas, such as code sharing, to make travel easier for passengers. They also plan to link up their frequent flier programs, sell seats on each others flights, and share access to airport lounges. This would a big benefit for customers as they would be able to utilize resources from either of the carriers.

Both the carriers are also planning to set up joint ventures across the Atlantic with Lufthansa. They are also looking at the possibility of forming alliances of that nature with carriers from Asia and Latin America.

According to Continental, however, there could be an element of risk involved in a merger of this nature, especially when it comes to moving out of the SkyTeam Alliance. It expressed concerns that such a move could have financial and other ramifications that could affect its business and operations.

The market, however, seemed upbeat after news of the merger, with Continental shares shooting up by 16% to end up at $15.59 and UAL, of which United is a subsidiary, showing a 23.8% jump in its shares to end at $8.11. This hike was not just solely as a result of the merger announcement, however; instead, it was part of a larger surge in airline shares.