Continental and United ready if others merge: sources

By Jui Chakravorty Das

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 be 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 special stock that gives it effective veto power over a Continental transaction, otherwise called a "golden share."

Both people said Continental would redeem its share and resume the talks with United, which 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.

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 people said.

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.

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

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)