United enters 'virtual merger'

The Baltimore Sun

United Airlines' quest for a large-scale tie-up has ended with a "virtual merger" with Continental Airlines, an agreement to link international networks, share technology and passenger perks that could eventually lead to a formal merger between the carriers.

The alliance is an important victory for United chief executive Glenn F. Tilton, whose reputation as a deal-maker appeared tarnished after merger discussions with three carriers, one of them Continental, didn't result in a deal. It also signals that the Chicago-based carrier is positioned to be a survivor in the shakeout that lies ahead for U.S. carriers if oil prices remain at current levels, analysts said.

"It is a vote of confidence in United as a business partner by Continental," said Henry Harteveldt, travel industry analyst with Forrester Research Inc., "and proof that United intends to stay in business."

The pact, signed by the airlines' CEOs in Chicago yesterday, had its roots in the failed United-Continental merger talks. Continental announced the deal was off in a terse announcement April 27, just days before a deal was expected to be unveiled, saying it intended to pursue a strategic alliance rather than a potentially disruptive merger.

Observers thought Continental was alluding to Fort Worth, Texas-based American Airlines, with which it had also held talks.

But Tilton saw an opening and seized it, contacting Continental CEO Larry Kellner the next day about a partnership that would bring the Houston-based airline into the Star Alliance, a global constellation of carriers that United co-founded.

"We began the work that led to the agreements announced today that take us well beyond the benefits of a standard code share," Tilton told United employees yesterday.

The deal that resulted will bring most of the benefits of a merger, analysts said, without the mess and high costs of merging disparate work forces. "Importantly, this gets them an even more attractive end-to-end global network," said Robert Mann, president of aviation consulting firm R.W. Mann & Co.

United and Continental intend to code-share domestically, an agreement that enables them to sell seats on each other's flights, link their frequent-flier programs and share access to airport lounges aimed at business travelers.

Continental will join the Star Alliance and form a series of global joint ventures with United, protected by antitrust immunity, linking their route networks on key overseas markets. The first such joint venture will involve flights across the Atlantic, flown by the carriers and Star members Lufthansa and Air Canada.

If they receive the blessings from U.S. and European regulators, the four carriers could closely collaborate on scheduling, marketing and even the type of aircraft used on a given route. Such arrangements typically involve sharing expenses among partners and divvying up the profits that accrue from linking carriers as well as new markets.

United and Lufthansa, for example, currently have antitrust immunity on flights from North America to Europe. That arrangement generates more than $1 billion annually for the airlines, says a person familiar with it. A United spokeswoman declined to comment on the money accrued from global partnerships.

The Star partners envision the venture as a response to a similar close partnership involving SkyTeam, the global marketing alliance that currently includes Continental as well as Delta and Northwest airlines, which are merging. All of the major SkyTeam partners, save Continental, recently gained antitrust immunity to coordinate flights across the North Atlantic.

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