Airline merger in United States set to produce biggest carrier

United Airlines parent UAL Corp will buy Continental Airlines Inc for $3.17bn (about 2.1bn) in a move aimed at giving better protection from the hazards that have battered airlines in recent years.

The merger, if approved by regulators, would create a large-scale global airline designed to lure the better-off business travellers.

The combined carrier, with over $29bn (19.3bn) in annual revenues, would carry the name United Airlines and be based in Chicago.

The deal, announced by the companies yesterday, is expected to produce $1bn (666m) to $1.2bn 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 US airline merger since Delta Air Lines' 2008 purchase of Northwest, and caps months of speculation that more industry consolidation was ahead.

However, the merger, while transforming 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.

Yesterday experts were saying the deal probably would 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 in Texas as its largest, and a workforce of nearly 90,000.

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 $3.17bn for Continental, or $22.68 a share.

That represents a 1.5 per cent 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 chief executive of the new holding company, which will be called United Continental Holdings Inc. UAL chief executive Glenn Tilton will be non-executive chairman.

Mr Smisek, 55, will become executive chairman when Mr Tilton steps aside, which is expected to happen two years after the merger is finalised.

One-off merger costs of about $1.2bn are expected over a three-year period. The companies said they expected to receive government approval and complete the transaction by the end of 20109

"We do not believe there are any material antitrust concerns," Mr Smisek said. "We have a high degree of confidence that this transaction will close."

Mr 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 news agency 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. "We don't think that will be substantive."

The Air Line Pilots Association, which represents pilots at both UAL and Continental, indicated tentative support for the deal but said pilots' support was "pivotal" to the merger's success.