Continental Airlines announced yesterday that it had accepted a bid from Air Canada as part of a plan to merge the two struggling North American carriers and then look for further alliances to create a competitive global carrier.
The bid was accepted by Continental as part of an auction intended to enable the carrier to emerge from bankruptcy. It was made by Air Canada in combination with an investor group led by David Bonderman, a Texas financier.
The bid calls for Continental, the fifth-largest U.S. carrier, to get an injection of $450 million in cash once the federal bankruptcy court accepts its plan to reorganize. The approval is expected early next year. Under the plan, Continental's creditors would receive a share of the equity in the airline.
The cash will provide money for improving Continental's service. In addition, both carriers expect to benefit from a meshing of their schedules that will enable them to feed passengers into one another's flights and they expect to save money by combining some operations.
At a meeting Friday afternoon, the 11-member board of Continental Airlines Holdings Inc., the airline's parent company, took only one vote to pick the Air Canada bid over an offer by a group led by Maxxam Inc.
A committee of Continental's unsecured creditors also expressed approval of the bid. The unsecured creditors, which include large banks and aircraft makers like Boeing and Airbus, will get 35.6 percent of the equity after the carrier is reorganized. The rest will be held by Air Canada and the Bonderman investor group.
If the acquisition is completed, Continental's new board will be made up of directors from Air Canada, the Bonderman group, unsecured creditors and Continental itself.
Randall Komninsky and Chris Matthews, co-chairmen of the unsecured creditors committee, said the creditors were willing to settle for an equity stake because they believed the company would ultimately be successful because of "the cash infusion that this investment provides and the plans that Continental has to improve its service in the future."
In two other airline bankruptcies, Eastern Airlines and Pan Am, unsecured creditors ended up with nothing or only a small part of their claims. Both those carriers tried to reorganize under bankruptcy protection but went out of business.
By contrast, Continental has operated smoothly since filing for bankruptcy protection in December 1990, and it appears to have maintained customer confidence.
Bankruptcy has not paid off for Continental's stockholders, however. The common and preferred stock and the subordinated debt will be eliminated in the reorganization.
Even though filings with the Securities and Exchange Commission have made clear that the stock will be phased out, Continental Holdings has continued to trade in the over-the-counter market, with a bid price yesterday of 22 cents and an asking price of 31 cents.
Continental reorganized under Chapter 11 once before, during HTC the 1980s when the airline was headed by Frank Lorenzo. Mr. Lorenzo cut wages and jobs and rebuilt the carrier, offering low fares.
Before long, however, Mr. Lorenzo added Eastern Airlines and People Express to his holdings, creating an empire where costs soared, service deteriorated and labor disputes proliferated. Eventually, both Eastern and Continental, which absorbed People Express, were forced to seek protection under Chapter 11 of the Federal Bankruptcy Code.
At present, there are a number of positive factors for Continental even though it is operating under Chapter 11. It has the lowest operating costs of the leading carriers, has a good route system, and under Robert S. Ferguson III, the vice chairman and chief executive, has been able to survive the summer, when traffic was weak and the industry had an intense fare war.
Mr. Ferguson said yesterday that "this is the first of several possible alliances that will enable Continental to establish its global presence in the future."
The two airlines share a troubled past. Montreal-based Air Canada and Houston-based Continental have both lost millions in recent years. In addition, each carrier has sought mergers with domestic and foreign partners. Hollis L. Harris, the president of Air Canada, was ousted as the head of Continental last year.
Air Canada, that nation's largest airline, has been hard at work seeking alliances under Mr. Harris, who also serves as vice chairman and chief executive.
It has an arrangement with United Airlines, which helps feed flights at crucial hubs like Chicago, La Guardia airport in New York and Dulles airport in Washington. It also plans to form an alliance with Air France to strengthen its presence in Europe.
Air Canada sought to merge with Canadian Airlines, Canada's second-largest carrier, but that effort has broken off. Denis Couture, a spokesman for Air Canada, said it would still like to explore such a merger.
The Continental agreement is subject to approval by the Transportation Department, which is expected to look favorably on the proposal.
The takeover of Continental is the first large bid that Mr. Bonderman has made on his own. He was formerly affiliated with the Bass Group, led by the financier Robert Bass of Fort Worth.
With Bass, Mr. Bonderman, a lawyer, has in the last decade led buyouts of Bell & Howell and the American Savings Bank, a large troubled savings and loan institution.