United, Continental now eye partnership

The airlines agreed tentatively earlier this year that Kellner would run a combined Continental-United as chief executive and Tilton would be chairman, according to a person familiar with the negotiations who asked not to be named because of not being authorized to talk publicly. Other details remain to be worked out.

Tilton issued his own statement to employees Tuesday in which he called consolidation "one of the changes necessary" for the industry to achieve sustained profitability.

"As the industry evolves, we will take the actions we need to strengthen our global competitiveness, and we will participate in consolidation when and if it is the right choice and provides the right benefits for employees, customers and shareholders," he said. The airline declined to comment on specifics.

Gaining approval from the two airlines' unions won't be easy _ especially at Chicago-based United, where employees are angry over what they see as excessive pay for senior managers following their own heavy cuts while the airline was in bankruptcy, from which it emerged in 2006.

"Mr. Tilton can no longer hide behind the robes of a bankruptcy judge to get what he wants from labor," the leaders of United's unions coalition said in a statement.

Michael Roach, an airline consultant in the San Francisco area, said United-Continental is not only the next logical step in the big domestic carriers' game of musical chairs but "about all that's left" because of added challenges that American and US Airways would face in efforts to consolidate.

"They fit together fine from a route structure point of view," he said. "If merger is the flavor of the month, why not?"

American and United are seen as unable to join forces because federal regulators wouldn't approve such a dominant combination of the Nos. 1 and 2.

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American could still make a bid for Northwest, according to Ray Neidl of Calyon Securities, because it has no other way to stop a domino effect that would leave it the nation's No. 3 airline.

Standard & Poor's analyst Philip Baggaley said there's a slight chance that Continental could combine with American but that would pose more antitrust hurdles because they have more overlapping routes than Continental and United.

No prospective combination's prospects were helped by crude oil prices rising more than $2 Tuesday to $113.79. Efforts to strengthen bottom lines by consolidating and cutting back could be torpedoed if that level doesn't drop.

"No matter how much capacity is taken out, unless oil prices come down or stabilize at least it's going to continue to be difficult for the airlines financially," said Matthew Jacob, an airline analyst at New York-based Majestic Research.

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