UPDATE 2-Continental Airlines shifts to Star Alliance

Tue Oct 27, 2009 3:01pm EDT

* Continental joins UAL in alliance

* Commercial agreements set with other members

* Says shifting alliances will add $100 mln a year

* Shares up 1.2 percent on NYSE (Adds comments from Continental executives, meeting, background, share move, byline)

By Deepa Seetharaman

NEW YORK, Oct 27 (Reuters) - Continental Airlines Inc CAL.N, the world's fifth-largest airline, joined the Star Alliance on Tuesday, becoming one of the top airlines in this network of 25 global carriers.

The switch marks the first time a major airline has switched alliances and brings Continental closer to UAL Corp's UAUA.O United Airlines about 18 months after merger talks ended between the two carriers.

"We decided to upgrade our alliance to a first-class alliance," said Continental's President and Chief Operating Officer Jeff Smisek at a media event.

Joining the Star Alliance allows Continental to share pricing, scheduling and other information within the alliance, which also includes U.S. Airways LCC.N.

Continental expects its membership in the Star Alliance, the world's largest airline network, to reap $100 million a year. In 2008, the airline drew $15.2 billion in revenue.

Smisek noted that no other carrier in the alliance had a strong foothold in the New York area, a hole that can be filled by Continental's hub in Newark Liberty International Airport. In turn, United offers opportunities up and down the West Coast of the United States that Continental lacks.

"What you want is to ally yourself with carriers that offer flight opportunities that you yourself don't offer," Smisek told reporters. He is poised to become Chief Executive of the airline on Jan. 1, 2010.

Shares of Continental were up 1.2 percent to $12.17 in afternoon trading on the New York Stock Exchange, while the Arca Airline index .XAL fell nearly 1.6 percent.

A MARQUEE EVENT

In his remarks, Continental's CEO Larry Kellner noted that United played an instrumental role in bringing Continental into the folds of the Star Alliance.

After the two airlines ended merger talks last year, United's CEO Glenn Tilton offered to sponsor Continental's foray into its network.

"In the current economic environment, the role of alliances takes on an even greater significance," said Tilton, who is also chairman of the airline. "No one single carrier can profitably serve every market."

Continental was previously part of SkyTeam, which is now led by Delta Air Lines Inc (DAL.N), now the world's largest carrier after its merger with Northwest Airlines last year. That union relegated Continental to a junior partner in SkyTeam, Smisek said.

The U.S. Transportation Department gave its final approval of Continental's switch in July.

Continental's entry into the Star Alliance was greeted with much fanfare Tuesday.

Lights flickered and music blared as top executives from each airline in the alliance took their seats in front of reporters. Then the gray backdrop behind them dropped to reveal a plane emblazoned with the words "Star Alliance."

"We can offer our corporate customers today a lot better alternatives than a week ago," Continental's current CEO, Larry Kellner, told reporters.

(Reporting by Deepa Seetharaman, editing by Gerald E. McCormick, Bernard Orr)

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