United, Continental In Early Merger Talks

February 7, 2008

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United Airlines and Continental Airlines are in the "very initial stages" of merger talks, a source familiar with the matter said on Thursday.

A deal between Delta Air Lines and Northwest Airlines -- reportedly also in talks -- would speed up negotiations between United and Continental, the person also said.

Continental's shares rose USD$1.43, or 5 percent to USD$30.20 in midday trading on the New York Stock Exchange. The shares of United parent UAL were up 57 cents, or 1.5 percent, at USD$38.23 on the Nasdaq.

Delta, the third-largest US carrier, has reportedly been in talks with both Northwest and UAL.

The Wall Street Journal said on Thursday the carrier's talks with Northwest have picked up steam, adding that a deal could be announced as early as next week.

Analysts have said a Delta merger with Northwest -- which would create the largest passenger airline in the world -- would spur Continental and United to start negotiations of their own.

"It's going to start the cascade of consolidation," said Robert Mann, airline industry consultant with R.W. Mann. "It will trigger a competitive response."

In November, Delta, which emerged from bankruptcy last spring after fending off a hostile takeover bid from US Airways, said it had formed a special board committee to review its strategic options.

Analysts have said the mergers could also lead to higher fares in some markets, at least in the short term, as combined carriers reduced flights and the number of seats and used their increased market power to raise prices.

"A merger in the airline industry is inevitable," Mann said. "Much of the capacity flies you below competitive prices. A merger would reduce capacity and firm up pricing."

Pardus Capital Management, an investment firm that, as of September, held stakes in UAL and Delta, estimated the two airlines could cut combined costs by USD$585 million a year.

Many airline experts, including leaders of major US carriers, say mergers are needed to help stabilize the volatile industry, which finally emerged from a five year slump in 2006 after racking up USD$35 billion in losses.

But high fuel prices and a softening US economy are threatening to stunt the fledgling recovery.