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Early this morning, United Airlines (UAUA) and Continental Airlines (CAL) announced that they will join forces to create the world's largest airline in a $3 billion deal.
The new airline will be bigger than Delta Air Lines (DAL) and will send flights as far as Shanghai and South America. The companies believe that the span of destinations should attract more business travelers and their higher fares. The deal, which will need approval from shareholders and antitrust regulators, is expected to close in the fourth quarter. The new company will be known as United Continental Holdings and will be based in Chicago. The airline's largest hub will be located in Houston.
The new company will hold on to the United name, but the planes will use the Continental colors and logos. Continental CEO Jeffery Smisek will run the new company after a two-year (or less) run by United CEO Glenn Tilton. When Tilton leaves the chairman seat, Smisek will take over. The two expect the new airline to bring in $29 billion in revenue and $7.4 billion in unrestricted cash.
The consolidation is expected to save $1 billion to $1.2 billion a year by 2013, including between $800 million and $900 million in new annual revenue. Speaking of consolidation in the industry, it may be the only way to save airlines. Fewer airlines mean higher prices, which should help drive earnings. Air travel is a necessary evil for many corporate warriors, which the company believes will lead to more money as this group of travelers shells out more cash.
Although the deal needs regulatory approval, it appears that the era of massive airlines is here -- but is it here to stay? I feel that mega airlines may be the only way for the airline industry to prosper again.
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