U.S. air carriers United Airlines — a wholly owned subsidiary of UAL Corp. (UAUA) — and Continental Airlines (CAL) declared a merger of their operations.
This merger would give birth to the world’s largest airline by size, pushing Delta Airlines (DAL) back. The deal, which was announced today, will still have to gain approval from shareholders and clear an anti-trust review by the Department of Justice. The airlines resumed merger talks last month after negotiations collapsed in 2008.
Deal Facts
The merger is reported to cost a whopping $3.2 billion (based on the current stock price) to United, which would involve compensating each Continental shareholder with 1.05 shares of the former company. This exchange will leave United owning 53% of the newly formed company, which will be christened as United Continental Holdings, with the rest owned by Continental. The airline will however retain the old name — United Airlines — but will carry Continental’s logo and will be headquartered in Chicago.
The board of directors of the newly formed company will seat 16 members and will comprise an equal number of members from both the combining companies. Though Glenn Tilton and Jeff Smisek the chairman, president and chief executive officer of United and Continental, respectively, will serve as non-executive chairman and executive chairman, respectively, along with being on the board of directors, the remaining names have yet to be finalized.
The deal will have no significant impact on the workforce of either United or Continental, which currently have 48,000 and 42,210 employees, respectively. The new company is expected to have a combined workforce of approximately 90,000 employees with a combined fleet of 693 planes.
One possible hurdle to the deal may be labor unions. Since the airline industry is highly unionized, it can pose a problem while integrating the workforce.
Synergies
The deal will create the world’s largest airline with enhanced capacity and improved service, overtaking Delta Airlines — which acquired Northwest Airlines last year — for the first slot. United, currently standing at the third position (in terms of traffic) and Continental at the fourth, will also benefit from each other’s route network, given no significant route overlaps. Combined, they would provide service to around 370 destinations in 59 countries.
The combined company is expected to generate annual revenues of $29 billion (United reported $16 billion of revenues in 2009 and Continental reported $12.6 billion) and will save cost by $1−1.2 billion by 2013. Sufficient financial flexibility is witnessed by $7.4 billion of excess cash.
Industry Trend
Consolidation between ailing U.S. carriers is the writing on the wall — a necessity in order to remain competitive and provide much needed stability. Airline profitability has been suffering for most of the past five years, due to the economic downturn that drained travel demand, leading to numerous firms leaving the industry.
These indicate hard time for the airlines. Low-cost airlines (“LCC”) have emerged as the winners, with most recording continued positive earnings.
The 1980s witnessed a major round of mergers. Delta bought Western, American acquired AirCal, Northwest possessed Republic, TWA acquired Ozark and US Air merged with Piedmont and PSA. We expect a spurt in merger and acquisition activity in response to the challenges facing the industry.
However, the consolidation in the industry is going to hit customers hard, who will be hard put to choose from a limited number of carriers, and will likely need to shell out higher fares.
Read the full analyst report on “UAUA”
Read the full analyst report on “CAL”
Read the full analyst report on “DAL”
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