Continental and United ready if others merge: sources

NEW YORK Tue Apr 15, 2008 12:37pm EDT

Continental Airlines planes prepare for take off at Houston /George Bush Intercontinental Airport in Houston, Texas, February 20, 2006. REUTERS/John Gress

Continental Airlines planes prepare for take off at Houston /George Bush Intercontinental Airport in Houston, Texas, February 20, 2006.

Credit: Reuters/John Gress

NEW YORK (Reuters) - Continental Airlines CAL.N and United Airlines UAUA.O have laid most of the groundwork for a merger, two people briefed on the matter said, and could have a deal ready "pretty quickly" if Delta Air Lines and Northwest Airlines announce a tie-up, one of them said.

Continental, which has said it would prefer to remain independent unless the competitive landscape changes, plans to get back to the negotiating table with United if a merger between Delta (DAL.N) and Northwest NWA.N is announced, both sources said.

Both the people requested not to be identified because of the confidential nature of the talks.

A Delta-Northwest merger, expected to be announced late Monday or Tuesday, would free Continental to pursue a merger with United because Northwest would forfeit a special "golden share" that gives it effective veto power over a Continental transaction.

Executives have said that if Northwest agrees to a deal, Continental can buy back that blocking share for $100.

Pilots unions at United and Continental have also held merger-related discussions, and merging those two work forces is not likely to be as major a hurdle as it has been with Delta and Northwest, the two sources said.

Continental's merger talks with United had stalled when the Delta-Northwest talks sputtered because the carriers' pilots unions at those two airlines could not agree on how to integrate seniority in a combined work force.

Continental Chief Executive Larry Kellner said on a conference call in January: "We like our position as the industry stands today but I suspect if you look forward, things will change."

"If we see something or hear something, we won't hesitate to act aggressively," he added.

UAL Chief Executive Glenn Tilton has been a proponent of airline consolidation for the past three years, saying the U.S. industry is too fragmented to compete effectively on a global level.

Continental was not immediately reachable for comment while United declined to comment.

A merger between United and Continental, the second and fourth-largest U.S. airlines respectively, would surpass a Delta-Northwest combination as the world's largest carrier.

After racking up $35 billion in losses and finally emerging from a five-year slump in 2006, U.S. airlines are hoping that mergers could lead to higher fares as combined carriers reduce flights and use their increased market power to raise prices.

The airlines also face a renewed sense of urgency to consolidate and cut costs amid skyrocketing fuel prices, a weak economy and a growing competitive threat from European carriers as trade barriers fall on trans-Atlantic travel.

Continental, whose shares closed at $21.89 on the New York Stock Exchange, has a market cap of $2.13 billion.

United Airlines, which closed at $23.61 on Nasdaq, has a market cap $2.72 billion.

Each of the airline stocks rose about 2 percent in post-market trade.

UBS analyst Kevin Crissey said in a report earlier this month: "We believe if Delta and Northwest get together, United and Continental will follow shortly thereafter."

"Additionally, we expect that Continental would receive a premium in such a deal."

(Reporting by Jui Chakravorty; Editing by Tim Dobbyn, Richard Chang)

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