Continental Airlines, UAL to merge

Continental Airlines and UAL shareholders approved the deal, which will create the world's biggest airline

By , AP Airlines Writers

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    A Continental Airlines Boeing 737 passenger jet passes United Airlines planes at Chicago's O'Hare International Airport in May. United Airlines parent UAL Corp will buy Continental Airlines Inc for $3.17 billion to form the world's largest carrier.
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The biggest airline in the world will have the United name, Continental's globe logo and potentially far-reaching effects on air travel.

Shareholders who approved combining the two companies Friday hope the new airline attracts more top-dollar corporate travelers with its larger network while reducing costs. Some industry watchers say the deal will lead to higher fares, but United and Continental say there's enough competition from low-cost airlines to keep prices from rising.

The vote for the deal topped 98 percent at both companies, which expect the $3 billion stock swap to close in the next two weeks after loose ends are tied up. Regulators in the U.S. and Europe have already signaled approval.

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With the voting over, the real work begins. Passengers won't notice changes immediately, but behind the scenes the airlines will be combining two separate groups of highly unionized workers, merging reservations systems and putting new paint jobs on the planes. The companies expect it will be at least a year before federal authorities approve their request to fly as one airline.

The UAL acquisition of Continental will combine United's strength in the Midwest, the West Coast and across the Pacific with Continental's presence in Texas, the East Coast and routes to Europe and Latin America. Measured by traffic — the number of miles flown by paying customers — the new United will leapfrog Delta, Air France-KLM and American Airlines to become the world's biggest airline.

Shareholders of United parent UAL Corp. will own 55 percent of the new company, to be called United Continental Holdings Inc. and based in United's hometown of Chicago. It will be led by Continental Airlines Inc. CEO Jeff Smisek.

Smisek hinted Friday at layoffs, saying there will be overlapping jobs when the two combine, but he did not give any numbers.

United and Continental overlap on few routes, but Rick Seaney, CEO of FareCompare.com, said he still expects the deal to affect how passengers fly and how much they pay.

"Losing a major competitor is likely to make prices rise — all things equal on the economy and fuel prices," he said.

United and Continental say they compete with low-cost carriers on about three-fourths of their U.S. routes, which will help keep fares down.

Kevin Mitchell, president of the Business Travel Coalition, said most of his corporate clients that he's talked to assume prices will rise. But he said many think fare increases will be offset by new or better discounts for big travel customers.

Several dozen passengers have sued over the United-Continental combination, claiming it will lead to fewer flights and higher fares. A federal judge in San Francisco was scheduled to hear closing arguments Friday on a request to block the deal. The plaintiffs claim the new airline would have a monopoly over nonstop flights on several routes within the U.S.

The deal has caused concern in Cleveland, which is Continental's smallest hub and overlaps with United's big hub in Chicago. This week, the airlines agreed to keep at least 90 percent of their Cleveland flights for two years after they merge, but they could pull out if they're losing money there. They could opt out sooner and pay damages of up to $20 million to the state attorney general's office.

Airport consultant Mike Boyd thinks the combined airline will try to keep the Cleveland hub going, but may not succeed.

"Cleveland has always been on the cusp — always," Boyd said, "and the merger doesn't change that."

Other Continental and United hubs are considered more secure, although local officials worry that the eventual departure of Continental's Houston headquarters will cost jobs in back-office functions such as accounting and human resources.

UAL and Continental together lost nearly $7 billion in 2008 and 2009 due to high fuel costs and the recession. Both returned to profitability last quarter, as fees and higher fares boosted revenue.

The history of the airline industry has been littered with mergers that didn't work out as well as planned.

American Airlines parent AMR Corp. bought TWA during a recession in 2001. Within a few years, American had dropped TWA's St. Louis hub and furloughed most of the TWA workers.

The 2005 deal to combine US Airways and America West is still plagued by animosity between the two labor groups.

Continental and United talked about a merger in 2008, but Continental — the smaller but more financially secure of the two — walked away from the table. Talks resumed this year after Delta Air Lines Inc.'s acquisition of Northwest seemed to go smoothly, creating a more powerful competitor.

UAL and Continental stock will continue to trade until the deal closes, at which time Continental shareholders will get 1.05 shares in the new United for each of their Continental shares.

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Koenig reported from Dallas, and Freed reported from Minneapolis. Associated Press Writers Juan A. Lozano in Houston and Don Babwin in Elk Grove Village, Illinois, contributed to this report.

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