The Wayback Machine - https://web.archive.org/web/20080702025202/http://www.chicagotribune.com:80/business/chi-fri-united-alliance-uaua-caljun20,0,3619794.story
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United, Continental join forces

Alliance provides benefits without cost of full merger

United Airlines' quest for a large-scale tie-up has ended with a "virtual merger" with Continental Airlines. It's an agreement to link international networks and share technology and passenger perks that could eventually lead to a formal merger between the carriers.

The alliance is an important victory for United Chief Executive Glenn Tilton, whose reputation as a dealmaker appeared tarnished after merger discussions with three carriers, one of them Continental, didn't result in a deal. It also signals that the Chicago-based carrier is positioned to be a survivor in the shakeout that lies ahead for U.S. carriers if oil prices remain at current levels, analysts said.

"It is a vote of confidence in United as a business partner by Continental," said Henry Harteveldt, travel industry analyst with Forrester Research Inc., "and proof that United intends to stay in business."

The pact, signed Thursday by the airlines' CEOs in Chicago, had its roots in the failed United-Continental merger talks. Continental announced the deal was off in a terse announcement April 27, just days before a deal was expected to be unveiled, saying it intended to pursue a strategic alliance rather than a potentially disruptive merger.

Observers thought Continental was alluding to Ft. Worth-based American Airlines, with whom it had also held talks.

But Tilton saw an opening and seized it, contacting Continental CEO Larry Kellner the next day about a partnership that would bring the Houston-based airline into the Star Alliance, the global constellation of carriers that United co-founded. "We began the work that led to the agreements announced today that take use well beyond the benefits of a standard code share," Tilton told United employees Thursday.

The deal that resulted will bring most of the benefits of a merger, analysts said, without the mess and high costs of merging disparate workforces. "Importantly, this gets them an even more attractive end-to-end global network," said Robert Mann, president of aviation consulting firm R.W. Mann & Co.

United and Continental plan to code share domestically, a deal that lets them sell seats on each others' flights, link their frequent-flier programs and share access to airport lounges aimed at business travelers.

Continental will join the Star Alliance and form a series of global joint ventures with United, protected by antitrust immunity, linking their route networks on key overseas markets. The first such joint venture will involve flights across the Atlantic, flown by the carriers and Star members Lufthansa and Air Canada.

If they receive the blessings from U.S. and European regulators, the four carriers could closely collaborate on scheduling, marketing and even the type of aircraft used on a given route. Such arrangements typically involving sharing expenses among partners and divvying up the profits that accrue from linking carriers as well as new markets.

United and Lufthansa, for example, have antitrust immunity on flights from North America to Europe. That arrangement generates more than $1 billion annually for the airlines, says a person familiar with it.

A United spokeswoman declined to comment on the money accrued from global partnerships.

The Star partners envision the venture as a response to a similar close partnership involving SkyTeam, the global marketing alliance that includes Continental as well as Delta Air Lines and Northwest Airlines, which are merging. All of the major SkyTeam partners, save Continental, recently gained antitrust immunity to coordinate flights across the North Atlantic.

"I see it as a precursor to a potential merger, a date before you get married," Harteveldt said.

The new alliance isn't likely to take effect for at least a year. Continental must wait for Delta and Northwest to complete their merger, triggering a provision that will free Continental from its SkyTeam contract. Continental must also give nine months notice before it exits.

In the meantime, both carriers are ratcheting down costs, reducing staff and shedding older aircraft. The measures are aimed at conserving cash and surviving the dual pressures of record fuel costs and a sharp drop in travel demand.

A sign of the times: United said this week that it expected its total unrestricted cash to drop by $100 million to $200 million during the second quarter. That's a busy time of the year when carriers typically bank money. United expects to have about $2.7 billion in cash at quarter's end.

In such a tough environment, forming an alliance rather than consummating a full-scale merger makes better fiscal sense because the carriers won't have to foot the more than $1 billion in integration costs that experts predict would accompany the real deal.

"Mergers cost money, and nobody has money right now," said Roger King, airline analyst with CreditSights Inc.



jjohnsson@tribune.com

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Related topic galleries: United Airlines, Restructuring and Recapitalization, Continental Airlines Incorporated, Delta Air Lines, Corporate Officers, Air Transportation, Transportation

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