By Julie Johnsson |
United Airlines has resumed merger discussions with Continental Airlines
that were suspended two years ago after the Houston-based carrier’s
board opted to remain independent, said people with direct knowledge of
the talks.

Continental was drawn back to the merger table after learning last week,
via press reports, that Chicago-based United was also courting
Phoenix-based US Airways, said a source. The source declined to speak on
the record due to the sensitive nature of the discussions.

Analysts consider Continental a better fit for United, since their combination would form the world’s largest airline with relatively little overlap in their networks to draw scrutiny from antitrust regulators.

But US Airways and United could also make a compelling case for a tie-up that would create the world’s second-largest carrier, with a large domestic network that would feed passengers to Lufthansa and other European alliance partners.

Continental can’t risk being left on the sidelines while its Star alliance partners merge, leaving it a distant fourth in the U.S. market with few options for growth, wrote analyst Hunter Keay of investment bank Stifel Nicolaus, in a research report Thursday morning.

“In our opinion, should Continental allow United to merge with US Airways, it could be a transformational event that could negatively impact Continental for decades and in the very near term,” Keay said.

United and Continental forged a close partnership after their 2008 merger talks failed, sharing a host of operations from information systems to airport gates that analysts described as a “virtual merger.”

Continental also shifted its global marketing alliance to Star, which was co-founded by United, forming vast joint ventures with its new partners to coordinate flying across both the Atlantic and Pacific oceans. That move fed consolidation rumors, although Continental appeared inclined to favor reaping the full benefits of the partnerships before consummating a financial merger.

But United and Continental may feel an urgency to complete a deal while market valuations for airlines are rising, and before emerging superpower Delta Air Lines Inc. starts to reap the full benefits of the global network it formed by merging with Northwest Airlines in 2008, said airline analyst Vaughn Cordle, a retired United pilot.

Those market pressures also increase the odds that new Continental CEO Jeff Smisek and United CEO Glenn Tilton will be able to resolve the “social” issues that helped unravel their previous attempt: disagreements over the surviving brand, headquarters location and the make-up of the management team, say people close to the carriers.

Tilton, 61, who gained a reputation in aviation circles as both a master strategist and a divisive figure, has added impetus to ensure that United’s merger overtures don’t fail this time around.
 
“Here’s what I figure: Glenn’s got no place to go. He’d like to go riding out on top,” said former Continental CEO Gordon Bethune. “Obviously, if he’s seen as engineering a Continental-United merger to create the largest airline in the world, that would be a feather in his cap… He’s not going to let it fail this time.”

The New York Times first reported the new talks between United and Continental.