UAL,the parent of United Airlines,and rival carrier Continental Airlinesboth hinted that they will consider merging following Monday's news that Delta Air Lineswill buy Northwest Airlines.
Jacquelyn Martin
United Airlines
UAL said Tuesday it will consider its own consolidation when and if it is the right choice and it provides the right benefits, while Continental said following word of the Delta-Northwest tie-up that it will review strategic alternatives. The two had been in advanced merger talks earlier this year.
"The industry has changed dramatically -- both globally and domestically -- and the old paradigms no longer apply; the current fuel and economic environment are only accelerating the need for a different approach," UAL Chairman and Chief Executive Glenn Tilton said in a message to employees.
"Consolidation is but one of the changes necessary to achieve sustained profitability, and we have been fully supportive," Tilton continued, saying the airline will take actions it needs to in order to "strengthen its global competitiveness."
Delta said Monday night it will buy Northwest for more than $3 billion in a bid to create the world's biggest airline, as carriers seek to counter skyrocketing fuel prices and a weak economy.
Continental said the proposed deal enables it to redeem the "golden share" that Northwest owns in Continental and that Continental will also review its participation in the alliance it has with Northwest, Delta and SkyTeam.
Analysts have said a Delta/Northwest deal could accelerate a merger of Continental and United Airlines.
No Help for Airline Shares
Still, shares of none of the airlines benefited from the merger news and speculation.
For Delta and Northwest to complete their combination to create the world's largest airline, they'll have unions to cajole, politicians to placate and antitrust regulators to convince — as well as persuading investors who have panned the deal to change their minds.
Shares of both carriers fell sharply Tuesday after executives said they currently do not plan to cut the number of U.S. flights beyond what they already disclosed individually — something analysts saw as limiting the cost saving or revenue increases from higher fares the airlines could get from the deal.
Delta fell more than 14 percent and Northwest dropped more than 10 percent Tuesday.
Continental shares were down more than 6 percent, and United Airlines stock was down similarly.
Ready to Merge 'Pretty Quickly'
According to a Reuters report that quoted two people briefed on the matter, Continental Airlines and United Airlines have laid most of the groundwork for a merger, and could have a deal ready "pretty quickly".
Continental, which has said it would prefer to remain independent unless the competitive landscape changes, plans to get back to the negotiating table with United, especially after the merger between between Delta and Northwest was announced, these people said.
With a new Delta-Northwest deal, Continental is now free to pursue a merger with United because Northwest would forfeit a special "golden share" that gives it effective veto power over a Continental transaction. Executives have said that if the Delta-Northwest merger goes through, Continental can buy back that blocking share for $100.
Pilots unions at United and Continental have also held merger-related discussions, and merging those two work forces is not likely to be as major a hurdle as it has been with Delta and Northwest, the two sources said.
Unionized pilots at United Airlines
"The management teams of United and Continental must understand one hard fact," the union leaders said. "The pilots of our respective airlines will not allow any merger unless management meets or exceeds our demands to be treated fairly and equitably."
"Our concerns will be addressed before we ever agree to allow our airlines to merge," they added.
A merger between United and Continental, the second and fourth-largest U.S. airlines respectively, would surpass the Delta-Northwest combination as the world's largest carrier.
After racking up $35 billion in losses and finally emerging from a five-year slump in 2006, U.S. airlines are hoping that mergers could lead to higher fares as combined carriers reduce flights and use their increased market power to raise prices.
The airlines also face a renewed sense of urgency to consolidate and cut costs amid skyrocketing fuel prices, a weak economy and a growing competitive threat from European carriers as trade barriers fall on trans-Atlantic travel.
- Wire services contributed to this report.