Talks deepen between United and Continental

[April 21, 2010]  DALLAS (AP) -- United Airlines and Continental Airlines are in the early stages of exchanging financial information that could lead to a deal to combine and create the world's biggest airline, people briefed on the talks said Tuesday.

United had been talking with US Airways about a combination, but speculation has increased that United is more interested in the larger Continental.

The exchange of information between United and Continental was confirmed Tuesday by two people who were briefed on the talks. They spoke on condition of anonymity because they were not authorized to publicly discuss the negotiations.

One person said bankers for United and Continental are discussing how to value the companies in a stock-for-stock swap.

That person said talks between United and US Airways have stopped for now with no firm date for starting again. However, the person stressed that United hasn't ruled out a combination with US Airways.

UAL Corp.'s United, Continental Airlines Inc. and US Airways declined to comment.

Another person briefed on the United-Continental talks said the two began exchanging information over the weekend. That job might be easier because the airlines considered combining in 2008, until Continental broke off talks.

A merger then was seen as risky because of soaring prices for jet fuel and weak balance sheets in the airline industry. Oil prices are lower today, U.S. airlines have built up cash reserves, and airlines have cut capacity, which should give them more power to raise fares this summer.

Former Continental CEO Gordon Bethune said if United and Continental are talking, each would want to understand the other's assets, liabilities, leases, union contracts and other details.

Due diligence, as the process of assessing a potential partner is called, is done to value a company that executives already believe is a good strategic fit, he said.

Bethune, who said he doesn't know whether his former company is holding merger talks, said Continental is attracted by United's strength in the Pacific, on the West Coast and its hub in Chicago, while United values Continental's network in Latin America and its hub in the New York area.

One holdup to a United-Continental deal could be a provision in the Continental pilots' union contract that bars their company from sharing revenue in a joint venture with another U.S. carrier.

Amy Flanagan, a spokeswoman for the Continental pilots, said the clause is the subject of current negotiations on a new contract. She said her union had not taken a position on a combination with United. The leader of the pilots' union at United has signaled more support for a tie-up with Continental than with US Airways.

Among U.S. carriers ranked by passenger traffic, United is third, Continental fourth and US Airways sixth, just behind Southwest Airlines.

Continental, which is based in Houston, rejected a combination with Chicago-based United in 2008 and instead joined United's Star Alliance in which they sell seats on each other's flights and will work closely together on international service.

But if Continental stands by now while United and US Airways combine, it would leave Continental by far the smallest of the so-called legacy carriers, also trailing AMR Corp.'s American Airlines.

If they combine, United and Continental would vault over Delta Air Lines Inc. to become the world's largest airline by traffic. A combined United and US Airways, which is based in Tempe, Ariz., would be smaller than Delta, which gained the No. 1 spot by buying Northwest in 2008.

In Tuesday trading, shares of UAL rose 12 cents to $21.78; Continental shares fell 4 cents to $21.94, and US Airways Group Inc. gained 25 cents, or 3.6 percent, to $7.14.

[Associated Press; By DAVID KOENIG and JOSHUA FREED]

Freed reported from Minneapolis.

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