Continental ( CAL) and UAL ( UAUA) say they will become partners, linking their networks as Continental leaves the Skyteam global alliance to join United in the Star group. The move represents an effort to capture some efficiences after Continental backed out of merger talks with United in April. It means Continental will leave both Skyteam, where it had been allied with Delta ( DAL) and Northwest ( NWA), and a code-share alliance with the two carriers. The planned combination of Delta and Northwest, which is awaiting regulatory approval, could have left Continental as a sort of junior partner in both groupings. Now Continental will bring its prized Newark hub to Star, where the principal shortcoming has been a near-vacuum at Newark and New York Kennedy, the two international airports in the world's largest travel market. Despite its vast international network, United, a founding Star member, has lacked a strong New York presence. Additionally, the deal offers a counter to the expanded range of a combined Delta and Northwest, which creates a broad international route system encompassing the trans-Atlantic, Asia-Pacific and Latin America. The deal "allows most of what would be merger economics without the business integration risks such as fleet, systems, real estate and work force," says aviation consultant Robert Mann. Continental CEO Larry Kellner and United CEO Glenn Tilton were meeting in Chicago Thursday afternoon to sign a framework agreement outlining the alliance and cooperation principles between their carriers. "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," Kellner said in a prepared statement.
In a recorded message to employees, Tilton said: "Following the decision by Continental not to merge, we suggested to Continental that an alliance partnership with ourselves and the Star Alliance would be compelling and allow us to achieve many of the benefits of a merger. We've developed a solid working relationship with the Continental team and we're very pleased to invite them into Star as our new partners." The carriers say they, along with other Star members, plan to establish joint ventures in the trans-Atlantic, Latin America and Pacific region. They would seek antitrust immunity from the U.S. Transportation Department. Initially, Continental will ask the department to allow it to join United -- along with Lufthansa, Air Canada and six other carriers -- in an immunized trans-Atlantic alliance where members pool revenue and jointly set schedules and fares. The venture would be competitive "with the proposed joint venture involving certain SkyTeam members that was recently granted antitrust immunity," Continental and United said. The two carriers also plan domestic code-sharing, which does not require antitrust immunity. They would offer each others' passengers access to frequent flier programs and airport lounges, and would share facilities, information technology and procurement. Continental's plans require regulatory approvals, as well as the termination of existing contracts with SkyTeam members. A principal contractual restriction, Continental said, would not end until nine months after the closing of the proposed Delta and Northwest merger. Shares in Continental gained 16% to $15.59, while United rose 24% to $8.11. Several other airlines also showed double-digit percentage increases as oil prices fell.
Since Star was created in 1997, alliances have played an increasingly important role in the airline industry. They now account for roughly 60% of worldwide capacity, and helped to enable the Delta and Northwest merger. Mann said the new combination puts AMR ( AMR) at a disadvantage and also marginalizes US Airways ( LCC), "particularly from a corporate travel buyer's perspective." However US Airways, which had also discussed a merger with United, said Thursday that "our longstanding code-share relationship with United remains intact, as does our status as a Star Alliance member carrier." So far, it said, there have been no discussions of a code-share or other relationship with Continental. Continental's move from Skyteam to Star also underscores the intense rivalries between alliances. In a recent release, for instance, Oneworld, which includes American and British Airways, noted that it is "the airline grouping with the best financial track record." Over the past three years, Oneworld said, members' combined net profits totaled $8.8 billion, while SkyTeam members lost $6.9 billion and Star members lost $10.1 billion.