US airline merger creates world's biggest carrier

It is hoped United's $8bn deal with Continental will staunch losses and create annual revenues of $29bn

United Airlines and its US rival Continental yesterday agreed a $3.2bn (£2.1bn) merger to create the world's largest carrier. The move by the loss-making companies was unveiled with the slogan "Let's Fly Together".

The two airlines announced the merger of equals "creating the world's leading airline" following unanimous approval from their boards. The deal must now be approved by shareholders and the regulators.

Richard Aboulafia, the vice-president of analysis at Teal Group, said: "This is positive news, although in some ways it was inevitable. It combines the critical mass and routes of United, with the good management track record of Continental... The US needs three big legacy carriers."

The companies expect the merger to be approved by the end of the year and the chief executives of the two companies will come up with an integration plan in the meantime.

The merged group would overtake American Airlines as the world's largest airline by passenger kilometres flown, according to the latest World Air Transport Statistics compiled by the International Air Transport Association. The move would expand its network and provide "a platform for improved profitability and sustainable long-term value for shareholders", the statement said.

Each year, 144 million passengers fly Continental or United to 370 destinations in 59 countries. The combined company would have annual revenues of $29bn based on last year's results, with $7.4bn in cash on the balance sheet.

During the recession, both airlines cut capacity and reported losses. Continental's full-year losses hit $282m as revenues slumped by 17.4 per cent. United lost $651m with revenues down by almost 20 per cent.

The boss of United, Glenn Tinton, will become chairman of the enlarged group, and Jeff Smisek, his opposite number at Continental, will take over as chief executive.

The name of the airline will be United Airlines and it will take Continental's colours. The management team is expected to include a roughly equal number of executives from both airlines, and the 16-member board of directors will include six independent directors from each of the companies and two seats handed to the unions.

United Continental's corporate and operational headquarters will be in Chicago, but it will maintain its largest operation in Continental's hometown of Houston.

JP Morgan and Goldman Sachs advised United on the deal, while Lazard and Morgan Stanley were called in by Continental.

Mr Tinton called it a "great day" for customers, employees and shareholders with the creation of a "truly global airline with an unparalleled network".

He continued: "We are creating a stronger, more efficient airline, both operationally and financially, better positioned to succeed in a dynamic and highly competitive global aviation industry."

The two companies have minimal overlap domestically and no overlapping routes overseas. The combined company will have 10 "hubs", including in the four largest cities in the US.

The agreement builds on the pair's membership of the Star Alliance Partnership, the world's largest airline network, which has 24 other member airlines from around the world. Mr Smisek talked of the mutual respect the airlines had built up working together in the Star Alliance. He added: "Together, we will have the financial strength necessary to make critical investments to continue to improve our products and services and to achieve and sustain profitability."

The executives said there would be minimal effect on front-line employees, with job cuts to the combined 86,000 workforce coming principally from retirements, attrition and voluntary redundancy. It also plans to introduce a performance-based incentive scheme. The merger is expected to deliver about $1bn of annual synergies by 2013.

The merged company will overtake Delta Airlines, which announced its plans to merge with Northwest Airlines in April 2008 to create the largest commercial airline in the world.

The move will raise expectations over a further round of consolidation in the industry, coming after British Airways finally agreed to merge with Iberia last month. American Airlines has been linked with possible tie-ups with US Airways Group and JetBlue Airways.