Continental, United Plan Global Cooperation

June 20, 2008

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Continental Airlines and United Airlines on Thursday announced a global cooperation plan, the latest move in the dance between major US carriers as they weigh mergers and alliances to help combat high fuel prices.

Continental, which called off merger talks with United in April, according to sources briefed on the matter, also plans to join United in the Star Alliance system, a significant defection which redraws the battle lines between the major airline groups.

Continental will request that the US Department of Transportation allow it to join United -- along with Germany's Lufthansa, Air Canada and six other carriers -- in their established antitrust immunized alliance.

Continental said it intends to terminate agreements with its current SkyTeam members, which include Air France-KLM, Delta Air Lines and Northwest Airlines.

Such a move by Continental, which was also considering joining British Airways and American Airlines in their oneworld alliance, was expected after SkyTeam members Delta and Northwest announced a plan to merge earlier this year.

"Alliances are critical for airlines and I think Continental had viewed the Northwest-Delta tie up as too much of an influence in the SkyTeam," said Brian Nelson, an analyst at Morningstar.

"Continental wanted to neutralize the situation and move to a solid team -- but I think the catalyst behind this was the Delta-Northwest merger."

Continental will now look to obtain approvals to enter Star Alliance, which includes Singapore Airlines, Japan's All Nippon Airways and US Airways among others.

Shares of Continental, UAL and all the major airlines jumped on Thursday, largely due to a dip in the price of crude oil futures. UAL shares closed up USD$1.56, or 24 percent, at USD$8.11 on Nasdaq, while Continental rose USD$2.15, or 16 percent, to USD$15.59 on the New York Stock Exchange.

Continental and United are looking to establish joint ventures allowing them to cooperate with each other and with other Star Alliance airlines in international regions.

They also plan to operate codeshares on domestic flights, meaning both carriers can sell tickets on the same flights, which reduces marketing and operational costs.

Continental Chief Executive Larry Kellner and United CEO Glenn Tilton are meeting in Chicago on Thursday afternoon to sign a framework agreement outlining the systemwide alliance.

"I expected this development -- the two systems are complementary," said Ray Neidl, airline analyst at Calyon Securities.

"If you look at the systems of US Airways, United and Continental, both domestically and worldwide, the three systems are very complementary -- so it should be beneficial."

Sky-high fuel prices and a weakening US economy have stalled the US airline industry's modest recovery from the 2001-2006 downturn. Oil prices have roughly doubled in the past year.

To survive, US airlines are slimming down. They have reduced services and capacity, cut jobs, increased fares, and added new fees and surcharges.

"As we experience some of the most challenging conditions airlines have ever faced, we look forward to the benefits of a new relationship with United and the other Star Alliance members," said Larry Kellner, chairman and CEO of Continental.