United-Continental deal is smooth flying for analysts

NEW YORK — Continental and United Airlines parent UAL Corp.
are expected to announce a merger deal early next week, creating a
global airline with little route overlap and new opportunities to
attract more premium-paying travelers.

“I see nothing but positives,” said Roger King, a bond analyst with CreditSights. “These guys will have the best global network of any airline.”

UAL brings to the union a strong transpacific presence that Continental lacks. While Continental has more routes to Latin America and its hub at Newark International Airport, a key domestic gateway between Europe and the U.S.

“I think United’s lucrative Pacific routes were the tipping point for Continental to merge,” said Robert Herbst, an analyst with AirlineFinancials.com. “It will help increase premium traffic from Asia and push yields higher, but mostly from the business side.”

Ticket prices could climb for some overseas routes due to less competition, but Terry Trippler from travel advisory firm Rules to Know said that will be short term.

“In the long run this will be good for travelers,”
he said. “Many more international flights, more international gateways
… more flights to Asia.”

United and Continental
boards are reportedly meeting Friday to discuss the final details of
the agreement and could have a deal inked by Monday. Final negotiations
hinge on whether the all-stock deal should include a share-price ratio.
Continental shares closed Thursday at $22.70, slightly higher than UAL’s $21.47.

UAL declined to comment and Continental didn’t immediately respond to phone calls.

Analysts expect U.S. antitrust regulators will give
the new airline its approval, and none of the analysts MarketWatch
spoke to could think of any gates or landing slots the new airline
might be forced to sell.

Continental’s major hubs are in Cleveland, Houston and Newark, while United’s hubs are in Denver, Los Angeles, Chicago, San Francisco, and Washington D.C.

There may be some capacity reductions for major
markets as result of the merger, but budget carriers are likely to step
in to fill any gaps. New York, for example, could see more of United’s J.F.K. operations move to Newark, N.J.

Combining operations between United and Continental is expected to go fairly smoothly. They have a close relationship on international routes through the Star Alliance, and they share some ticketing, frequent-flier benefits, and certain ground and marketing operations.

Labor could create some headwinds, but pilot and
flight attendant groups from both airlines are currently in contract
negotiations, increasing the opportunities for management to offer
better pay and benefits to get personnel on board. United has reportedly offered to lift its flight attendant pay to match that of Continental.

Pilots, a key group that Delta Airlines
and Northwest went to great lengths to satisfy before fully committing
to a merger deal in 2008, belong to the same umbrella labor
organization, the Air Line Pilots Association. That group has in place a policy for integrating pilot seniority lists in case of a merger.

Because of the minimal overlap between, layoffs and furloughs will likely be few.

“It’s more positive for them to have labor agreements first, but I don’t think they have to have them,” said Herbst.

United’s pilot union declined to comment, while no one at Continental’s pilot union was immediately available to respond.

Regardless of how smoothly the carriers join forces, the ultimate winner is still the industry as a whole, according to Hunter Keay, an analyst with Stifel Nicolaus.

“The big strength is a long-term one because it
means one less legacy carrier to buy planes; one less carrier to add
capacity when the economy is getting better,” Keay said.

———

(c) 2010, MarketWatch.com Inc.

Visit MarketWatch on the Web at http://www.marketwatch.com

Distributed by McClatchy-Tribune Information Services.