Continental, United merge into world's largest airline

CHICAGO -- United and Continental Airlines are expected to announce this morning that they are combining operations to form the world's largest airline after their boards voted to approve the deal Sunday, sources said.

The deal is the culmination of a lengthy search by United CEO Glenn Tilton for a partner that would bolster his carrier's global network and that would promote consolidation in a badly fragmented industry plagued by chronic losses.

Continental CEO Jeff Smisek will be named CEO of the new carrier, while Tilton will move to its board as non-executive chairman for a two-year term, said a person familiar with the deal.

The new airline, to be named United, will retain its headquarters in Chicago, where United employs about 700 people, sources said.

Its operations center will be based in Chicago's Willis Tower, which was formerly known as the Sears Tower. The carrier will move forward with plans to place its crucial nerve center and 2,800 staffers in the skyscraper starting in October, sources said.

Unlike the earlier merger that United contemplated with US Airways, this deal isn't expected to involve large-scale cuts since United's and Continental's networks have little overlap.

The carriers expect to continue serving the 370 cities where United or Continental currently fly.

Rather, executives hope that linking Continental's strong Latin American and European routes to United's connections in Asia will generate a surge of new international traffic and revenues.

They expect the new carrier to generate cost and revenue synergies of about $1.2 billion, with between $800 million and $900 million of that gain resulting from the greater scope of operations, said a person familiar with the deal. Executives expect to save $200 million to $300 million by reducing overhead and overlapping administrative functions.

However, the carrier is expected to retain a significant presence in Houston, where Continental is headquartered, sources said.

City and government leaders had petitioned executives at Continental and United to consider placing headquarters for the combined carrier in the southern Texas metropolis.

Houston will become the largest hub for the new carrier, bypassing United's longstanding fortress hub at Chicago's O'Hare International Airport, a source said.

As anticipated, Continental shareholders will receive 1.05 shares of United's stock in the all-stock deal, which will be structured as a merger of equals. As a result, United will control 55 percent of the company to Continental's 45 percent, a source said.

The new airline will be governed by a 16-person board, which will include two union representatives and six independent directors, a source said.