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United And Continental?


After coming out of bankruptcy on Feb. 1 much leaner, United Airlines' parent, UAL (UAUA), is drawing fresh attention for its turnaround efforts. There's also buzz of a merger with Continental Airlines (CAL). The two have talked in the past, and some pros think the effort will be rekindled. One money manager who owns UAL shares, has close ties with executives, and asked not to be named, says Continental has not given up. "The strategic fit [would] be great," he argues. A merger would make UAL-Continental tops in the U.S. In passenger revenues, UAL is second only to AMR (AMR), parent of American Airlines. Combined, UAL and Continental, now No. 5, would have sales of $30 billion, vs. AMR's $20.7 billion. Since March, UAL stock has fallen from 43 to 23.83. Helane Becker of investment firm Benchmark, who rates UAL a "buy," says the rumored merger is "entirely possible." Apart from the fit, she says, a merger would remove "overlapping capacity" from the system. Since Chapter 11, UAL's labor costs are competitive with those of low-cost airlines, notes Becker. She has a 12-month price target of 43, based on eight times her estimated 2007 profit estimate of $5.32 a share. For 2006, she expects a loss of 25 cents. Roger King of CreditSights.com notes in a report that UAL is strong in Asia, while Continental is strong in the Atlantic. That suggests that a merger would strategically benefit both. UAL and Continental both declined comment on merger rumors.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

By Gene G. Marcial


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