United stands ready to merge

United Airlines is in advanced negotiations to combine with Houston-based Continental Airlines and is poised to quickly seal a deal if Delta Air Lines and Northwest Airlines merge, a person close to the airlines said Thursday.

However, Chicago-based United hasn't ruled out pursuing Delta if the Atlanta-based carrier is unable to overcome labor differences with Northwest, sources said.

If a United-Continental deal is achieved, Continental Chief Executive Larry Kellner likely would run the company, while United CEO Glenn Tilton would be chairman of the board, sources said. The management team, as well as the board of directors, would be drawn from both carriers.

Not settled is where the merged airline would be located. That would be determined later, and the choice of a headquarters is not expected to be a deal breaker, sources said.

In the meantime, the situation remains fluid, with United keeping its options open. Doing so gives United greater leverage in its negotiations with both airlines, as well as a fallback in case talks with Continental falter, said people familiar with the situation.

The jockeying for power and position is playing out across the airline industry as carriers contemplate massive consolidation that would remake aviation in the U.S.

While talks involving United, Delta, Northwest and Continental have drawn headlines, every major carrier is exploring potential mergers, sources said.

This isn't the first time that United has pursued a merger with Delta or Continental. Either arrangement would create the world's largest carrier, with relatively little overlap in operations.

Both Continental and Delta have large bases in New York, where United is weak, and a large array of flights to Europe and Latin America that would fit well with United's robust trans-Pacific routes.

A decade ago, United, the nation's second-largest carrier to American Airlines, came within hours of announcing a deal with Delta, the No. 3 carrier. However, talks failed when the two sides were unable to resolve a labor issue that emerged late in the process, sources said.

And United and Continental seriously considered a tie-up last year, as US Airways made a hostile bid for Delta. But those talks foundered when the carriers could not resolve who would lead the combined company.

Continental likely would join the Star Alliance, a global marketing venture whose founders included United and Lufthansa AG, a source said. Continental's hub at Newark would provide the New York gateway craved by Lufthansa and other Star members, as well a sizable network of flights across the Southern United States.

Like Delta and Northwest, Continental is a member of SkyTeam, the global marketing alliance dominated by Air France-KLM Group. But Continental's ties aren't as deep as those of its peers.

Delta and Northwest last year sought antitrust immunity on trans-Atlantic flights, which would enable them to coordinate schedules and other services with SkyTeam partners Air France, KLM, Alitalia and CSA Czech Airlines. Continental opted not to participate in the venture.

Continental, the nation's fourth-largest airline, would prefer to remain independent but determined it wouldn't remain on the sidelines if larger players merged.

"If we see something, we won't hesitate to act aggressively," Kellner told analysts last month.

Tentative merger overtures began last fall as airline stocks plummeted amid skyrocketing oil prices and turned into serious negotiations as Delta's board in January authorized CEO Richard Anderson to explore a deal with either United or Northwest.

"They were in a really good position to play United off against Northwest," said Roger King, airline analyst with CreditSights Inc.

However, United refused to be drawn into a bidding war, and Anderson turned to Northwest, his former employer and SkyTeam ally.

Delta and Northwest are close to a deal but are waiting while their pilot groups hammer out a framework for resolving seniority and other issues, sources said.

United, too, is in limbo as talks drag on. By merging with Delta, Northwest would forfeit a contractual term that gives it virtual veto power over a Continental tie-up.

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jjohnsson@tribune.com

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