The Wall Street Journal-20080216-Continental Spoke to AMR Amid Airlines- Merger Drive

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Continental Spoke to AMR Amid Airlines' Merger Drive

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Continental Airlines Inc., which already is in preliminary talks with United Airlines parent UAL Corp. about a possible merger, also discussed a potential tie-up with American Airlines parent AMR Corp., people familiar with the situation said.

The talks were exploratory, and it isn't clear they will go further, these people said. They mark the latest exploratory efforts among airlines and their advisers as they gear up for what they anticipate could be an industry merger wave.

The discussions come as Delta Air Lines Inc. and Northwest Airlines Corp. are in the final stages of hammering out a merger agreement, people knowledgeable about the matter said. Some issues remain, they said, including reaching an agreement with the pilots of both airlines on a common labor contract and integrating their seniority systems. Delta also had discussed a combination with United in recent weeks, these people said.

The prospect of a Delta-Northwest marriage recently galvanized United and Continental to renew talks after previous efforts to find accord went nowhere, these people said. But one person familiar with the matter said Continental and United aren't in the final stages of negotiations. Continental hasn't yet signed a confidentiality agreement with United that would precede serious discussions, this person said.

Glenn Tilton, UAL's chief executive, has been a proponent of airline consolidation for the past three years, saying the U.S. industry is too fragmented to compete on a global stage with more-powerful international rivals. In the past, United looked at both Continental and Delta as possible partners.

Houston-based Continental has said it prefers to remain independent unless the competitive landscape changes and its rivals pair up. The carrier for now is precluded from merging with another airline because Northwest can block such a move by virtue of holding a "golden share" in Continental. But if Northwest agrees to merge with Delta or another airline, Continental could buy back that blocking preferred stock for a nominal fee and be free to chart its own course, even if Northwest's own deal later fell apart.

AMR Chief Financial Officer Tom Horton told analysts last month that given the industry's history of losses and fragmented state, "we do think consolidation has the potential to create efficiencies and expand product offerings and benefit the industry and consumers." Mr. Horton noted that American has an active history of purchasing assets from other carriers and bought Reno Air and Trans World Airlines Inc. outright.

The combination of Delta, now the No. 3 airline by passenger traffic, and Northwest, the fifth, would become the largest carrier and significantly outdistance American in traffic. A marriage of United and Continental, the second- and fourth-largest airlines, would be larger still.

Airlines have on and off considered mergers for the past several years as a way to raise fares, cut costs and reduce the number of seats they fly. Such combinations face serious obstacles, including integrating airplane fleets, computer systems and work forces. If deals are struck in the coming days or weeks, they would face intense antitrust scrutiny by the Justice Department. Airlines are rushing to get deals done now in the hope of having them undergo that regulatory review in the waning days of the Republican administration, which is thought to be more laissez-faire about combinations.

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Melanie Trottman contributed to this article.Write to Susan Carey at [email protected]