US airlines could yield $1bn merger benefits

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UAL, the parent of United Airlines, and Continental Airlines estimate that combining the two carriers could generate about $1.1bn in cost savings and revenues.

A deal could be announced as soon as Monday as, after the negotiations hit trouble a week ago, the two parties this week moved closer to sealing their merger, agreeing that Continental shares would be exchanged for 1.05 United shares, according to people close to the talks.

The companies’ boards have yet to approve the deal but were meeting on Friday to discuss the proposed transaction.

People close to the discussions suggested that putting the two companies together in a stock swap could yield more than $1bn of synergies, of which about $200m would be cost savings, net of additional costs associated with renegotiating labour contracts.

Such benefits are crucial to the rationale of airline transactions and would provide value to both parties’ shareholders in a deal that has been negotiated without a premium.

United had a market value of $3.6bn on Friday, while Continental’s market capitalisation was $3.1bn.

United and Continental have little overlap in their domestic or international routes – a factor that may ease approval from antitrust regulators but which limits the potential for cost cutting.

Moreover, unlike the last time the pair held merger discussions in 2008, they are now members of the Star Alliance and have formed a transcontinental venture, which means certain revenue benefits may have already been realised.

Joining the two carriers’ networks should enable the combined company to compete more effectively with Delta, the current industry leader, for the travel budgets of large companies.

The apparent success of Delta’s 2008 merger with Northwest helped prompt the airlines to start talks again about consolidation, two years after Continental abandoned a proposed deal with United at the 11th hour.

Delta this month suggested, when reporting its first-quarter earnings, that it had picked up $100m of market share in corporate travel in the past 12 months.

Delta’s management also struck a more optimistic tone when discussing the recovery in corporate spending than rival Continental.

Gary Chase, an analyst at Barclays Capital, wrote in a research note this month: “We believe consolidation will be a material positive for the entire industry.”

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