The pending merger of United Airlines, a wholly owned subsidiary of UAL Corp. (UAUA), and Continental Airlines (CAL) finally received approval from shareholders of both the companies.


Announced on May 3, 2010, the merger won the antitrust approval from the U.S. government in August and received clearance from the European Commission in July. The merger is expected to close by October 1.


Upon completion, the UAUA-CAL merger will create the world’s largest airline with enhanced capacity and improved services, overtaking Delta Airlines (DAL), which acquired Northwest Airlines last year. We believe the newly formed company will enjoy a favorable position in an increasingly competitive global and domestic aviation industry and will perform better than any airline standing alone.


The integrated company will have fourteen domestic overlapping routes, including Houston-Washington; Cleveland-Denver; Cleveland-Washington; and Houston-San Francisco. However, it will not have any international overlapping routes. The combined company will also create a network that can compete for long-haul and high-volume business travels. It is expected to generate annual revenues of $29 billion and save costs in the range of $1– $1.2 billion by 2013.


The merger is expected to cost United Airlines around $3.2 billion, including compensation for Continental shareholders with 1.05 shares. This exchange will leave United Airlines with a 55% interest in the newly formed company, with the rest to be owned by Continental. The combined company will retain the old name — United Airlines, but will carry Continental’s logo and will be headquartered in Chicago.


The acquisition of Continental will strengthen United Airlines’ position in the Midwest, the West Coast and across the Pacific with Continental's presence in Texas, the East Coast and routes to Europe and Latin America. The new United will also leapfrog Delta, Air France-KLM and American Airlines, a wholly owned subsidiary of AMR Corporation (AMR).


We are currently maintaining our Neutral recommendation on United Airlines, supported by our Zacks # 3 (Hold) Rank.


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