United, Continental Create World's Largest Airline

CHICAGO ( TheStreet) -- The eight hubs of the new United ( UAUA) Airlines stretch out across the continental U.S., a visual reminder of the mammoth size of the newly-anointed world's largest airline.

The merger of Continental ( CAL) and United, announced earlier today, creates an airline with hubs in the two most important East Coast cities (New York and Washington), the two most important West Coast cities (Los Angeles and San Francisco) and the most important Midwest city (Chicago).

The carrier's largest hub will be Houston.
Continental and United Airlines

Other striking numbers include the 91 million frequent flier club members and the 144 million passengers carried annually by the two carriers, which will come together in a deal valued at $3.15 billion, as 1.05 United shares are exchanged for each Continental share. The carrier will take United's name and Continental's colors and corporate symbol, necessitating a repainting of its 692 aircraft, assuming it keeps them all.

Synergies after added costs are expected to total between $1 and $1.2 billion by 2013, with the $800 million to $900 million resulting from enhanced revenue. Labor costs are expected to rise by an undisclosed amount as United employees' pay is pulled up to Continental levels.

On its face, the merger seems "a match made in heaven," said Continental CEO Jeff Smisek during a conference call Monday morning. Smisek said he foresees no regulatory barriers. "Continental is strong where United is weak and United is strong where Continental is weak," he said. "We have no international route overlap."

Smisek will head the combined companies, while United CEO Glenn Tilton will become chairman. Given the breadth of the carriers' networks, "the two happiest groups of employees are corporate sales organizations," said Tilton.

Of course, airline mergers can be tricky. The current template is the 2006 merger between Delta ( DAL) and Northwest, which was announced in 2006 and may have been the smoothest and most successful airline merger to date. It seems that similar ease is expected in putting together United and Continental. A half dozen analysts congratulated the two CEOs on the conference call.

One thing to keep in mind, however, is that the regulatory climate for Delta/Northwest was easier as the deal was approved during the final days of the Bush administration, in less than seven months. The pilots also integrated easily, largely because of the efforts of one man: Lee Moak, the powerful chairman of the Delta chapter of the Air Line Pilots Association. Moak presided over a seniority integration and the approval of an improved contract, a deal that has now become the industry standard.

In mid-morning trading Monday morning, stock in Continental was down 4 cents to $22.31. Shares in United were up 14 cents to $21.74. The bigger gainers were shares of Alaska ( ALK) and US Airways ( LCC). Both could be considered acquisition candidates, if the current move towards airline industry consolidation gains steam.

-- Written by Ted Reed in Charlotte, N.C.
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United, Continental Reach Merger Pact

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