Pulse Check Update: UAL and CAL Edge Closer to Uniting

Includes: UAL, UAUA
by: Research Recap

Despite running into some snags, there’s a growing sense of inevitability about a merger between UAL Corp (UAUA) and Continental Airlines (NYSE:CAL). As our previous post noted, Continental makes a more logical partner for United than US Airways (LCC), which called off talks with UAL last week. Now the focus is shifting to the price and other details of a United-Continental combination.

DealBook reported Tuesday that “officials gave hints that deal negotiations were ongoing and that Chicago would remain the airline’s headquarters.” Glenn Tilton, United’s chief executive, said that the airline — which reported a loss for the quarter — still believes there are too many planes in the air and that consolidation is necessary to help the company make money.

Though Jamie Baker of JPMorgan Chase wrote in a report last week that a deal is much less likely now that Continental doesn’t have to worry about a potential US Airways deal, many analysts seem optimistic about the companies’ ability to work something out. “This is the right merger at the right time,” said Keay, who gave both UAL and Continental a “buy” rating. “I don’t see a lot of impediments. Corporate travel is improving, there’s no revenue crisis and oil isn’t $145 a barrel.” The deal would bring about a global network which Jeff Straebler, a fixed-income strategist at RBS Securities, Inc., expects would outweigh near-term costs. “They would make a much stronger carrier.” (BusinessWeek)

“Consolidation prospects would be a significant positive for the industry and, in our view, serve to enhance what is already a compelling stand-alone case for the equities,” said Barclays Capital analyst Gary Chase. (Reuters)

The question would then become, at what price. Jesup & Lamont’s Becker said United has been “able to improve revenue and cut costs” (Real Clear Markets). Still, Jim Corridore, a Standard & Poor’s equity analyst, sees a chance that “Continental will get more of a premium than previously thought if there is a merger agreement,” meaning not such good news for United. “That would be more costly for United, pushing United down.” (BusinessWeek)

But there’s a lot at stake here on both sides, according to Vicki Bryan, a debt analyst at Gimme Credit. She believes Continental and United would benefit almost equally from a deal. “If Continental plays a larger role at United, United could move away from Airbus,” said Teal Group analyst Richard Aboulafia. “And I think Continental could end up playing a significant role. Continental has a better track record of profitability, and their way of doing things will likely prevail.”

If the Continental-United talks do result in a deal, it would leave US Airways way behind, with analysts questioning its chances of survival. (DealBook)

Cowen & Co. aerospace analyst Cai von Rumohr questions whether just one manufacturer could even supply a combined carrier with all the jets it needs. “Their organization may be too big for just one supplier,” said von Rumohr. “They could buy from both Boeing (NYSE:BA) and Airbus.” (MarketWatch).

But given that the airways are littered with failed merger talks, that may be jumping a little too far ahead.

Avram J. Davis

This post was based on Company Searches of Alacra Pulse for the companies mentioned.