Airlines closing in on merger deals
- United and Continental, Delta and Northwest talk about combining.
By Julie Johnsson
CHICAGO - Four major U.S. carriers, including United Airlines, appear closer to consummating deals that would radically remake the airline industry, say people close to the airlines.
Chicago-based United is in merger talks with Continental Airlines and is poised to seal its deal if Delta Air Lines and Northwest Airlines combine first, sources say.
The deals could be announced in rapid succession as early as this month, provided carriers are able to resolve a host of issues, ranging from fights over how to share the executive suite to offering concessions to labor.
The sequence in which events unfold is crucial to United's chances of finally completing the megadeal that Chief Executive Glenn Tilton has long craved, experts say.
By merging with Delta, Northwest would command about 28 percent of the domestic market, according to CreditSights Inc. But Northwest also would forfeit a "golden share" in Continental, a legacy of a cross-investment that grants it veto power over a merger by the Houston-based carrier.
That would eliminate a significant obstacle to a tie-up between United and Continental, which would create the nation's largest carrier, with 36 percent of the market and a robust route network stretching across the Atlantic and Pacific Oceans.
United, the nation's second-largest airline, and Continental, the fourth-largest, have discussed melding operations several times during the past decade and were close to an agreement a year ago, say people close to the airlines.
Those talks ultimately collapsed when the airlines were unable to resolve sticky issues, such as who would run the merged carrier or where the headquarters would be based, sources say.
Egos are less of a concern in the current negotiations, sources say. Tilton appears more open to ceding power. And some leaders within United's powerful labor unions privately say they would welcome the chance to work with Continental managers, known for fostering healthy employee relations.
However, "social" issues, as airline executives put it, have proven thorny for Delta and Northwest, said a person close to the airlines. After talks stalled over the issue of who would run the combined airline, Northwest's board ordered CEO Doug Steenland last week to find a way to get the deal done. The boardroom directive, as well as Delta and Northwest's improved merger prospects, were first reported by The Wall Street Journal's Web site Wednesday. All four airlines declined to comment.
Northwest's board's steely resolve greatly increases the chances that consolidation overtures will succeed where previous efforts failed, said a source close to the Minnesota-based airline.
"If you go so far down this process, you can't turn around and go back," he said.
Airline boards are under pressure from hedge funds and other investors to find a way to boost share prices that fell calamitously last year as oil prices skyrocketed. Merging would likely boost share prices for the short term, analysts say, even though the longer-term success of the new enterprise is by no means assured.
"There's a much greater likelihood of something happening in this unique situation," said Roger King, airline analyst with CreditSights Inc.
If Delta and Northwest fail to resolve their differences, broader consolidation could sputter. Continental wouldn't have as great an incentive, with the No. 3 and 5 players on the sidelines. And Delta, which also has mulled a merger overture from United, seems less enthused to deal with the likely clash that would result from melding two disparate cultures, sources said.
Meanwhile, Tilton reiterated to United employees Tuesday that the carrier would only participate in a merger "when the opportunity and the time is right for all of our stakeholders. No one will be making our decisions for us."
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