(Bloomberg) — Continental Airlines Inc. would make the best merger partner for United Airlines, creating the world’s largest carrier, should the pair restart talks that fizzled in 2008, analysts said.
Executives at Continental started a review of options two days ago after the disclosure of United’s talks with US Airways Group Inc., according to a person familiar with the matter who asked not to be identified because details are confidential. Spokesmen for all three airlines declined to comment.
Continental and United belong to the Star Alliance marketing group and have a joint venture with Deutsche Lufthansa AG for trans-Atlantic flights. Together, Houston-based Continental and UAL Corp.’s United would surpass Delta Air Lines Inc. for the top spot in global passenger traffic.
“I always thought United-Continental would figure out a way to do a deal, and that the joint venture was the beginning of the relationship,” said Michael Derchin, an analyst at CRT Capital Group LLC in Stamford, Connecticut. “If they combine and it’s done in a constructive way, United is the stronger partner for Continental, no question.”
United is the third-largest U.S. carrier, while Continental is the fourth-biggest and US Airways is No. 6. A United-US Airways combination would vault past AMR Corp.’s American Airlines in second place.
Under then-Chief Executive Officer Larry Kellner, Continental abandoned merger talks with United in 2008 in favor of an alliance allowing the carriers to sell seats on each other’s planes. Last month, CEO Jeff Smisek said he was open to a merger if the carrier needs to “bulk up defensively.”
Continental and United could realign some domestic flights to feed their combined international networks, taking advantage of the higher fares and profits on overseas routes, said Ray Neidl, an independent airline analyst based in New York.
United hubs in Los Angeles, Chicago and Washington would complement Continental operations at Houston and New Jersey’s Newark airport, Neidl said, calling a pairing of the airlines “the best possible combination you could make.”
Continental rose 73 cents, or 3.6 percent, to $21.23 yesterday in New York Stock Exchange composite trading, while UAL climbed $1.28, or 6.8 percent, to $20.23 on the Nasdaq Stock Market. US Airways gained 73 cents, or 11 percent, to $7.55 for the biggest advance in the Bloomberg U.S. Airlines Index.
Broader route systems help airlines by allowing them to funnel in more passengers, a boost for a U.S. industry starting to recover from a travel slump in the recession. Passenger traffic for the six biggest carriers rose in March for the largest monthly increase since May 2008.
United and Tempe, Arizona-based US Airways began their discussions in mid-February, people familiar with the matter have said. The combination probably would be an all-stock transaction, with US Airways as the acquirer, the people said.
Julie King, a spokeswoman for Continental, declined to comment, as did United’s Jean Medina and US Airways’ James Olson.
Continental “is still reluctant to move, we believe, particularly since the current United-Continental alliance provides many of the benefits of a merger without any of the risks,” said Douglas Runte, managing director at Piper Jaffray & Co. in New York.
Smisek, 55, was president when Continental dropped its 2008 negotiations with United, which went on to unsuccessful talks that year with US Airways. He became CEO in January and departed from one of Kellner’s strategies last month by deciding to charge for meals in the coach cabin on most domestic flights.
Should the airline decide to pursue a merger, “a combination of United and Continental makes more sense” than a US Airways deal, said Runte, who like Neidl and Derchin doesn’t have ratings on the airlines.
Continental’s main jet fleet was 351 Boeing Co. planes as of Sept. 30, according to a Web site fact sheet. United has 360 planes in its main fleet, a mix of Boeing and Airbus SAS jets, according to a regulatory filing.
Pilots have kept in contact since the 2008 merger discussions. Continental’s pilot union chief, Jay Pierce, said his group would back a United tie-up under the right terms, while United’s chapter of the Air Line Pilots Association renewed its criticism of a US Airways tie-up.
Continental would fall further behind the three bigger U.S. carriers should a United-US Airways merger succeed. American isn’t in “any way threatened” by tie-up talks among competitors, CEO Gerard Arpey told reporters yesterday in Los Angeles.
For Continental, the appeal of a combination with United might be a spur to action, said Vicki Bryan, a high-yield debt analyst at bond-research firm Gimme Credit.
“Let’s see — help create the largest airline in the world or be a distant fourth place in the U.S. in an overcrowded industry,” Bryan wrote yesterday in a note to clients. “Stay tuned.”