United merger decision nearing - Continental directors to review plan; Chicago carrier narrows net loss

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Chicago Tribune (IL) - Wednesday, April 28, 2010
Author: Julie Johnsson, TRIBUNE REPORTER

Continental Airlines' board of directors is meeting Wednesday to review a potential merger with United Airlines, and the carriers are expected to decide within a matter of days whether to combine operations, say people close to the situation.

As in 2008, when the carriers came close to completing a deal, United's quarterly financial results may sway the deliberations, observers said. Spokeswomen for United and Continental declined to comment on any aspect of the merger reports.

United likely bolstered its case for a merger by posting its strongest first-quarter results in a decade Tuesday, topping most of its peers and beating analysts' estimates, though the company reported a net loss. That result is in contrast to two years ago, when directors of Houston-based Continental decided to end talks after United posted poor financial results, sources said.

But United's robust showing may complicate the carriers' efforts to wrap up a deal. United's shareholders could balk at any transaction that doesn't pay a hefty premium for the Chicago-based carrier, said analyst Hunter Keay of Stifel Nicolaus.

"We believe shares of United are undervalued, and we envision pushback from United equity holders should management propose a no-premium stock-swap transaction below $27 per share," Keay wrote in a research report Tuesday. United's stock closed at $20.51 Tuesday, down 8 percent on a day when Wall Street saw a broad decline. Keay said he thinks United shares are worth $33, with or without a merger.

Spurred by strong revenue growth, United Airlines narrowed its first-quarter net loss to $82 million, or 49 cents per share. That's an improvement from the $382 million net loss, or $2.64 per share, United reported a year earlier. Excluding certain items, United lost $92 million, or 55 cents a share, beating the 79 cents-per-share loss that analysts predicted.

United reported an operating profit of $58 million, excluding noncash charges. That's the strongest first-quarter showing in a decade by United, which typically sees passenger demand slow during the winter months.

United's passenger revenue jumped 15 percent, to $3.87 billion, versus prior-year results, although higher fuel costs offset much of the gain. But United executives were bullish on the airline's prospects for the spring and summer months.

"Two years ago, we laid out for you a performance agenda built around bringing our company to industry leadership with a clear sense of urgency," said John Tague, United executive vice president and chief operating officer. "Whether measured in on-time performance, revenue management or margin improvements, we are clearly delivering against that agenda."

United executives declined to directly address the merger expectations that have swirled around their carrier in recent weeks. Sources said the merged carrier would keep the United brand, which carries far greater name recognition overseas than does Continental.

The new company would be headquartered in Chicago and led by Continental CEO Jeff Smisek. United CEO Glenn Tilton would move to the carrier's board as non-executive chairman. The makeup of the rest of the management team is being decided, a source told the Tribune.

Meanwhile, United is proceeding with plans to build a new operations center and offices for 2,800 workers in Chicago's Willis Tower, where it holds a lease for about 400,000 square feet. The city of Chicago is providing $35 million in incentives to United, which plans to begin moving workers from its Elk Grove Township offices in October.