United and Continental in merger talks

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The Independent Online

United Airlines, the second largest carrier in the US, has opened merger talks with its smaller rival Continental, in a move that could create a $9bn airline industry giant and trigger a round of consolidation among the pair's rivals.

Shares across the industry took off yesterday, as news of the talks was reported and as another US airline, AirTran, made a hostile $290m bid for Midwest Air. Investors have begun to hope that the country's fragmented and perennially unprofitable airline industry may finally begin to consolidate.

The chief executives of United and Continental have talked recently and are keen on a deal, although bankers are yet to become deeply involved. Together the two companies would accelerate past American Airlines to become the largest US domestic carrier, by passenger miles flown.

Talk of consolidation in the industry has been building since US Airways made an audacious $8bn bid last month for Delta, the No3 carrier, which is restructuring under Chapter 11 bankruptcy protection. Although Delta's management has been cool on the cash-and-shares bid, US Airways hopes to woo the airline's bondholders and other creditors.

United has also approached Delta in recent weeks with the possibility of making a white knight bid for the airline. Analysts all cautioned that there were many hurdles in the way of consolidation, particularly for a United-Continental tie-up, although that deal would be attractive as Continental is strong in the north-east while United is centred on the west coast.

Ray Neidl, airline sector analyst at Calyon Securities, told clients: "We believe the industry is fragmented and primed for consolidation; various management teams and financial sources are ready to begin the process but we are not sure if the regulators and politicians are ready for major industry consolidation."

Airline mergers would allow managements to strip out the overhead costs from their airport bases, use aircraft more efficiently and - although few would admit it in public - cut flight numbers on routes that overlap. That, in turn, could ensure that ticket prices - which have been on the rise since the industry's post-9/11 nadir - can continue to increase. United only emerged from Chapter 11 in February of this year. Continental has twice in its history had to file for bankruptcy protection, most recently in 1990.

The developments in the US came as Qantas, the Australian flag carrier, reached a deal to be sold for $A11.1bn (£4.4bn) to a group led by Macquarie, the Australian bank, and Texas Pacific. The airline rejected the consortium's opening offer yesterday but both sides are expected to make a formal announcement early today. It would be the biggest buyout in Australian history, and the world's biggest airline acquisition. A Qantas sale would require the approval of the Australian government and also needs to be backed by investors holding more than 90 per cent of the airline's equity.

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