NEW YORK (CNNMoney.com) -- UAL Corp.'s United Airlines announced on Monday it will merge with Continental Airlines in a deal worth $3.2 billion, creating the world's largest airline.
The combined company, which will fly under the United moniker and Continental logo, is now larger than Delta Air Lines (DAL, Fortune 500), which became the country's largest airline when it merged with Northwest Airlines in 2008. It is expected to serve more than 144 million passengers per year and fly to 370 destinations in 59 countries.
Under the terms of the deal, Continental shareholders will receive 1.05 shares of United common stock for each Continental common share they own, the companies said in a statement.
United shareholders would own approximately 55% of the combined company and Continental shareholders would own approximately 45%.
As a result of the merger, the companies expect to have annual revenues of $29 billion and save between $1 billion and $1.2 billion over the next three years.
United and Continental discussed combining in 2008 and Houston-based Continental backed out. United boasts a stronger financial position this time around though.
Last week, the Chicago-based company reported a first-quarter loss of $82 million, much narrower than the $382 million loss posted a year earlier. And revenue jumped 15% to $4.2 billion.
Thanks to an improved financial performance, United was expected to have more weight in the talks. Last weekend, the company pushed to base the deal on the closing price of its shares the day before an agreement is signed.
The stock prices for UAL (UAUA, Fortune 500) and Continental (CAL, Fortune 500) edged up slightly at the start of trading. This is after Continental's stock fell 1.5% on Friday, while UAL was little changed.
Assuming the deal clears antitrust hurdles, the combined airline would be based in Chicago, United's home, and its largest hub will be Houston, Continental's base, according to the executives. The holding company will be named United Continental Holdings and the carrier itself will be named United Airlines. Continental chief executive Smisek will serve as CEO of the merged company.
"Let Jeff [Smisek] experience the challenges for a little while," said Tilton in a press conference, noting that he was CEO of UAL for eight years, while Smisek has been CEO of Continental for one quarter.
Robert W. Mann, Jr., airline industry consultant, said that airfares probably won't be affected between major cities, but they could increase for some international flights and for flights into and out of smaller cities, where the carrier has more pricing control.
Harlan Platt, a finance professor who covers the airline industry at Northeastern University's College of Business Administration, said the merger would allow the airlines to control more than 80% of international flights to and from major airports in Newark, N.J., Houston and San Francisco.
He said this would give the merged airline more pricing control, but it also presents a potential hurdle to the Justice Department approving the deal. The regulator could force the airlines to give up some of their gates at these airports.
Raymond Neidl, an airline consultant and analyst, said consolidation is the best thing for the highly competitive airline industry.
"This is necessary not only for the carriers but for consumers as well since a financially stable industry is needed to serve the traveling public and this merger should contribute towards that goal," he said.
He described the industry as crowded with "too many airlines with too many hubs offering too many seats."
Last month, United also discussed the possibility of merging with Phoenix-based US Airways (LCC, Fortune 500).
Rick Seaney, chief executive of FareCompare.com, said that other mergers are unlikely, unless fuel prices continue to rise and put further pressure on the industry.
"It is hard to imagine any other big airline players linking up in the short term, but all bets are off if oil zooms up over $100 a barrel," said Seaney.
Worried about a fare hike after Continental Airlines (CAL) and United Airlines (UAUA) merge? Try this comment on for size and see if it sets those worries free.
"No airfare increase is built into the synergies," said Continental CEO Jeff Smisek (pictured) during a conference call with analysts and the media following the carriers' announcement of their $3 billion megamerger agreement with United.
Smisek was responding to a question on the call as to whether the $1 billion to $1.2 billion in net annual synergies the company expected to achieve over the three-year post-merger period would come, in part, from fare hikes. After all, $800 million to $900 million of that billion-dollar windfall is predicted to come from incremental annual revenues.
While the carriers didn't factor in a fare increase when coming up with their synergies figure, a large part of it deals with expected cost savings, as is the case with most mergers. And that concerns the pilots unions and likely other employees at both carriers.
"The pilots who fly for Continental and United are prepared to stand shoulder to shoulder to support the creation of a viable, profitable merged company," said Capt. Wendy Morse, who represents United pilots, and Capt. Jay Pierce, who represents Continental pilots, as part of a joint statement from the Air Line Pilots Association.
The unions call for an equitable integration of the pilots based on seniority and a new, joint collective-bargaining agreement.
They further noted: "We are also prepared to stand shoulder to shoulder in opposition of this transaction should these ideals and concepts not immediately be fostered by the new management team. Both the United and Continental pilot groups understand what can be achieved by working together; and, in concert with the new management team, under these conditions welcome the opportunities and expected rewards of building a winning combination."
Back-Office Employees Will Suffer Most From Layoffs
Pilots, flight attendants, and those working at the terminals that serve both airlines may find themselves with more job security than other employees at the carriers. That's because the two airlines have very little overlap with their domestic routes and none with their international. And after the merger, the combined airlines plans to continue serving the same communities each carrier currently services.
Employees working in back-office positions in areas such as marketing, finance, legal and administration, will likely take the greatest hit.
While the CEOs of Continental and United acknowledged that corporate and administrative jobs are typically reduced in any merger as part of cost-saving moves, the carriers plan to cut staff as much as possible by via attrition and voluntary layoffs. They declined to disclose the magnitude of the layoffs that they envision as part of their "synergies."
A United spokeswoman declined to disclose the percentage of employees who are in-flight crew, versus those who are considered administrative and corporate.
After Two Years, Continental Came Back to the Table
The deal is subject to regulatory and shareholder approval and is expected to close by the end of the year. After the deal closes, United shareholders will own a 55% stake in the combined company, United Continental Holdings, which will operate under the carrier name United Airlines.
Although United shareholders will hold the majority stake, it was Continental that chose to revive the courtship between the two airlines, going to United on April 9 with the idea of resuming merger talks that had failed two years earlier.
"In 2008, when we had these earlier discussions, the economy was at the cusp of the greatest recession since the global depression. Fuel prices were screaming to unprecedented highs and subsequently went even higher. The capital markets were distressed and had limited access for airlines to capital markets, and our liquidity position of both carriers was a bit stressed as well," Smisek said. "Now, fast forward to today, where we have the economy improving, we've got business travel returning, we've got fuel prices [that] although high are manageable, we have access to the capital markets, and our liquidity is better than we've had in many, many years. So, the stars have aligned for what is a great strategic move."
Continental's Smisek made his move to resume talks with United when he learned through media reports that it was entertaining a deal with US Airways. He noted he's been keeping a keen eye on rival Delta Air Lines, which is currently the world's largest carrier and a strong competitor in the New York and Latin America markets.
With the merger, Continental, the world's fifth-largest airline, and United, the fourth, will become the largest carrier based on passenger traffic.
