United, Continental now eye partnership

updated 7:19 p.m. ET April 15, 2008

CHICAGO - United Airlines and Continental Airlines each signaled interest in industry consolidation Tuesday, with the two increasingly seen as a potential pair that would leapfrog the newly proposed Delta-Northwest team as the world's largest carrier.

While the two airlines were publicly mum about their preferences for a partner, it was clear the Delta-Northwest agreement had broken the logjam on industry consolidation and breathed new urgency into talks between United and Continental on how they could combine. Other tie-ups also are possible.

Wall Street analysts and other airline experts see another attempted pairing of large U.S. airlines as almost inevitable but indicated the industry's future under two mega-carriers would remain volatile amid record fuel prices and economic weakness.

"It's a dangerous time to be making mergers when you're heavily dependent on exogenous variables over which you have no control," said John Pincavage, a Westport, Conn.-based financial adviser to airlines. "Make the wrong moves and you could be building a bigger Titanic."

Marrying UAL Corp.'s United to Continental Airlines Inc. would create a company with a combined $35 billion in revenues and nearly 100,000 employees. Between them they would have eight U.S. hubs and an impressive domestic and worldwide network.

But Wall Street was skeptical about such a pairing. United shares fell $1.29, or 5.5 percent, to close Tuesday at $22.32, while Continental's declined $1.53, or 7 percent, to $20.36.

Letting their two big competitors combine without a challenge would bump them down to the third- and fifth-largest U.S. airlines, respectively, and pose a threat to their business on numerous domestic and international routes. AMR Corp.'s American Airlines, currently No. 1, also would slip but appears to have fewer consolidation options, according to industry experts.

"Certainly this puts a lot of pressure on them," Darryl Jenkins, a Virginia-based consultant to numerous airlines, said of United and Continental. "This airline (Delta-Northwest) is big enough that it's going to take away accounts from smaller airlines."

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Teaming up would enable them to top the size and scope of a combined Delta Air Lines Inc. and Northwest Airlines Corp., with its $32 billion in revenue and 87,000 employees.

In a statement to employees, Continental's CEO Larry Kellner and President Jeff Smisek said the Houston-based airline's preference has been to remain independent, "as long as the competitive landscape remained the same." However, the executives noted, "the landscape is changing."

"We will review our strategic alternatives and make sure we remain a strong long-term competitor," they said.

United CEO Glenn Tilton reportedly approached Continental at least as far back as 2006 but was rebuffed. More recently, the two sides have held exploratory talks and their pilots' unions also have been involved.

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