Continental Abandons Merger Talks With United
By
ANDREW ROSS SORKIN and
MICHELINE MAYNARD
Published: April 28, 2008
Continental Airlines said Sunday that it had abandoned merger talks with United Airlines and was planning to remain an independent carrier, a blow to lengthy efforts by United to find a merger partner.
Times Topics:
Continental |
UAL |
Air Travel
Continental’s decision, announced by the airline Sunday afternoon, will change the complex game of musical chairs that the airline industry is playing after the merger announcement last week by
Delta Air Lines and
Northwest Airlines.
Continental’s move was a stunning development for United’s parent, UAL, which had been negotiating in expectation of reaching a deal by late this week. As recently as Friday, it looked as though Continental, based in Houston, and United, based outside Chicago, were on the way to reaching a merger agreement.
Continental decided to drop the discussions after UAL announced worse-than-expected earnings, which sent shares falling last week. On Tuesday, United said it lost $537 million during the first quarter, on sharply higher costs for jet fuel. The airline, which spent more than three years under bankruptcy protection earlier this decade, said it would cut flights and eliminate a further 1,000 jobs. Directors at Continental, who met Sunday afternoon, feared that a merger with United could put their company in peril.
Continental, which had been expected to take management responsibilities in a deal with United, survived two bankruptcy filings of its own in the 1980s and 1990s, and has been considered one of the industry’s best-run carriers.
With the United-Continental deal scrapped, a new set of pairings is likely to take place. UAL is expected to push to reach a deal with
US Airways, with which it had also been discussing a merger, people involved in the talks said.
In a statement, United's chief executive, Glenn F. Tilton, said on Sunday night: "Consolidation is under way.
Ensuring you have the right partner is everything. We will pursue all options to ensure a strong, sustainable future for our airline and will not shy away from the touch choices necessary to create value for our shareholders and benefit our employees and customers."
Meanwhile, Continental is expected to press ahead with preliminary talks to create a three-way alliance — short of a full merger — with American Airlines and British Airways.
In a letter to Continental employees, Lawrence W. Kellner, the airline’s chief executive, and Jeffery A. Smisek, its president, wrote: “The board very carefully considered all the risks and benefits of a merger with another airline, and determined that the risks of a merger at this time outweigh the potential rewards, as compared to Continental’s prospects on a stand-alone basis.”
They said they worried a deal would put company’s operational and financial strengths “at risk.” They also hinted at forming a new alliance, saying, “We are considering alternatives to SkyTeam” — an alliance with Delta and Northwest — “as we carefully evaluate which major global alliance will be best for Continental over the long term.”
The executives did not mention American or British Airways. The two sides had agreed on several issues in their talks. Mr. Kellner would have run the combined company, while United’s chief executive, Mr. Tilton, would have stepped away from day-to-day operations.
Mr. Tilton had advocated strongly for industry consolidation, saying it was the only solution to help the struggling airlines become consistently profitable. US Airways’ chief executive, W. Douglas Parker, has also pushed for consolidation, making an unsuccessful hostile bid last year for Delta before it emerged from bankruptcy protection.
Mr. Kellner, in his letter, at least seemed sympathetic to the industry’s plight, telling employees, “Every U.S. carrier, including Continental, is under enormous pressure from record high fuel prices, a slowing U.S. economy and a weak dollar.”
United’s stock closed at $21.43 on Monday. That evening, Delta and Northwest announced their merger plans. On Tuesday, United’s shares closed below $14. They ended the week at $15.21, off 29 percent for the week.
On Tuesday, United’s chief financial officer, Frederic F. Brace, said repeatedly that the airline was in compliance with the covenants of its bank agreements. But, Mr. Brace added, “With the recent spike in fuel prices and the softening economy the trajectory of our covenant coverage is downward.” Because of steps the airline was taking to cut costs, he said, “it’s really very difficult to predict whether we will have an issue or not.”
On Wednesday, after the sharp drop in its stock, United issued a statement saying that it was in compliance with the terms of deals governing its credit arrangements with banks, including
JPMorgan Chase, Citibank and
Credit Suisse.
Analysts said the situation created doubt about United’s health, an issue that has hovered around United since it emerged from bankruptcy protection in early 2006. That concern was a reason talks between Delta and United, which took place while Delta was under bankruptcy protection earlier this decade, never gained traction.
Meanwhile, Continental’s next steps are far from clear. Although it planned to pursue discussions with American about joining its alliance with British Airways, the corporate cultures of Continental and American differ significantly.
American, as the nation’s biggest airline until the Delta-Northwest deal is completed, is likely to want to dictate the terms under which the much-smaller Continental comes on board.
At the same time, Continental’s membership in the SkyTeam alliance could offer much greater reach than a deal with American and British Airways.
The new Delta will be bigger than American, and other members in SkyTeam include KLM and Air France, which have a broader base than American and British Airways across Europe and the rest of the world.
Meanwhile, in a further sign of the industry's problems, Eos Airlines, a business-class carrier, said Sunday that it had filed bankrupcy protection and ceased flying. Eos said it filed for Chapter 11 protection in New York on Saturday. Eos offered business class flights between New York's JFK Airport and Stanstead Airport in London. It was the latest in a series of small airlines to file for bankruptcy protection in the last few weeks.
Eos made its final flights from London to New York on Sunday, and canceled flights in the opposite direction. It began flying in 2005.
