(Repeats item first released late on April 15)
By Deepa Seetharaman and John Crawley
NEW YORK/WASHINGTON, April 15 United Airlines
is now in separate merger talks with Continental Airlines Inc
(CAL.N) and US Airways Group Inc LCC.N for the second time in
two years as carriers feel pressure to further cut capacity,
build revenue and accelerate the industry's recovery.
Word of potential consolidation, confirmed by a source
familiar with the matter [nN15247749], has pushed the shares of
U.S. airlines higher.
Many Wall Street analysts have responded positively to the
prospect of a deal, especially between United, a unit of UAL
Corp UAUA.O and Continental.
"Consolidation prospects would be a significant positive
for the industry and, in our view, serve to enhance what is
already a compelling stand-alone case for the equities," said
Barclays Capital analyst Gary Chase.
Here is how the industry may shape up should should one or
two mergers materialize.
Analysts and other industry experts agree a
Continental/United pairing makes the most strategic sense and
would have the best chance of clearing labor and antitrust
The two have a common pilot unions and less route overlap
than United/US Airways. They are also partners in the Star
alliance, which has been lucrative.
A Continental/United merger would create an airline larger
than Delta Air Lines Inc (DAL.N), which bought Northwest
Airlines in 2008 to become the world's biggest carrier.
Such a combination would have a combined annual revenue of
$28.9 billion, based on 2009 figures. Delta last year generated
"I think it's the path of least resistance from a labor
perspective, from a regulatory review perspective and from a
political perspective, frankly too," said Stifel Nicolaus
analyst Hunter Keay, who said Continental could bid for United
in a note to clients this week.
"Continental had far too much to lose by not pursuing a
Continental has big hubs in Houston, Newark, New Jersey,
and Cleveland, and smaller service in Los Angeles. United is
strong in Washington, Chicago, Denver, Los Angeles and San
Continental walked away from merger discussions in 2008 due
to concerns about United's finances. Analysts say United has
since bolstered its balance sheet and is in much better shape.
Continental pulled in $12.6 billion in revenue last year.
No. 2 American Airlines, a unit of AMR Corp AMR.N, drew in
nearly $20 billion.
Should United and Continental merger, US Airways could
consider teaming with AMR, whose network could "suddenly become
somewhat marginalized," Keay said in a note this week.
A merger between United and US Airways would create the No.
3 airline in the world, according to Gimme Credit analyst Vicki
Analysts have said this is a less favorable scenario due to
potential labor problems and more route overlap than a
United/Continental deal. But insiders say the airlines would
still benefit from less capacity, which enables them to raise
"It would cement Delta in its position," Bryan said. "It
could stymie the marketing position of the remaining U.S.
The merger would likely face more regulatory scrutiny than
a United/Continental proposal because of overlap in Washington,
where US Airways has a major hub. US Airways also has
operations in Los Angeles and Phoenix, which could raise
competition questions in a United deal, experts said.
Opposition by United pilots to a merger with US Airways and
discord among pilots at US Airways over seniority following the
carrier's merger with America West Airlines in 2005 are red
flags cited by some industry experts.
Keay projected a merger between United and US Airways had a
15 percent chance of working out.
A tie-up with Continental and American Airlines is a
distant possibility should United and US Airways merge, but the
two carriers have significant overlap in many markets that
might be "potentially dilutive," Bryan said.
Absent a merger, individual U.S. airlines are expected to
move to strengthen their balance sheets.
North American loss estimates have been pared to $2
billion, with passenger demand up and revenues growing in an
improving economy, according to the International Air Transport
One worry, however, is fuel prices, which have been on the
rise and are expected to average $81 this year, compared with
$62 in 2009.
Analyst Helane Becker, a Jesup & Lamont managing director,
believes the major carriers would continue to grow
internationally and through their alliances if left on their
"The big international airlines are going to do better than
the smaller domestic airlines. Airlines like Continental,
Delta, United and American -- those guys will do fine," Becker
Consultant Mike Boyd said major carriers do not have to
merge to thrive.
"Does it make the entity more efficient, a savior to the
system? No," Boyd said of consolidation.
He said Continental and American are both strong as
stand-alone carriers, especially American with its robust South
American business and its plans to build up its transatlantic
United has a good route network, but would have to shift
its primary focus away from becoming smaller to growing in a
smart way so it could be an attractive merger partner, Boyd
"They can survive," he added.
US Airways, however, could struggle without an
international partner, Becker said.
Boyd said US Airways "has some challenges" in integrating
pilots groups from its 2005 merger with America West Airlines.
"The asset they have is probably the most visionary
management in the industry," Boyd added.
(Reporting by John Crawley in Washington, Deepa Seetharaman
in New York and Karen Jacobs in Atlanta; editing by Andre