United-Continental Merger Complete - Analyst Blog

The $3.2 billion pending merger of United Airlines, a wholly owned subsidiary of UAL Corp. and Continental Airlines finally closed on October 1. The two companies combined to form a new entity –– United Continental Holdings Inc. (UAL). United Continental expects the integration process to take 12 to 18 months.

This is the second merger in the airline industry in the last two years following the oil price hike in 2008 and economic downturn in 2009. This merger creates the world’s largest airline with increased capacity and improved services, overtaking Delta Airlines (DAL), which acquired Northwest Airlines in 2008. The newly formed company is expected to enjoy a favorable position in an increasingly competitive global and domestic aviation industry and perform better than any airline standing alone.

The new United Continental is the holding company for both United Airlines and Continental Airlines. This company will be headquartered in Chicago with a significant presence in Houston, which is its largest hub. United Continental Holdings will operate throughout the Americas, Europe and Asia from its hubs in Chicago, Cleveland, Denver, Guam, Houston, Los Angeles, New York, San Francisco, Tokyo and Washington, D.C. together with United Express, Continental Express and Continental Connection.

As a result of the merger, Continental shareholders will receive 1.05 shares of United Continental Holdings’ common stock for each share of Continental common stock previously held. UAL Corporation shareholders will now own approximately 55% of the equity of the holding company and former Continental shareholders will now own approximately 45%.

The combined entity is expected to generate net annual synergies of $1 to $1.2 billion by 2013, with $800 to $900 million in additional revenue and $200 to $300 million in cost savings. Layoffs are expected to be minimal, but the merger faces pilot integration risk. The joint agreement between pilots is yet to be made.

The new United will leapfrog Delta, Air France-KLM and American Airlines, a wholly owned subsidiary of AMR Corporation (AMR). It will likely have one of the industry’s best cash positions, industry-leading revenues and a competitive cost structure.

We believe consolidation is a major opportunity for most air carriers to enhance their revenues, cost performance relative to its peers and competitive position going forward. This is an opportune moment for companies to consolidate in order to regain lost profit post-recession and operate efficiently and effectively.

The third merger has been announced by the discount leader, Southwest Airlines (LUV), which joined the consolidation drive and announced a deal last week to acquire fellow discounter AirTran Holdings (AAI). Although the $3.4 billion merger has been approved by the boards of both companies, regulatory and shareholder approvals are still pending.