TWA, Pan Am, Eastern… and now Continental

As long expected, UAL is buying Continental Airlines for about $3.17 billion in stock, forming the world’s largest carrier and further shrinking the U.S. airline industry. It’s the biggest deal in the market since Delta’s 2008 purchase of Northwest, and retires another storied brand from the days when air travel was as much about glamor as it was about getting somewhere. The combined company will have 10 hubs, with Houston as its largest, and a workforce of nearly 90,000.

Continental Chief Executive Jeff Smisek will run the Chicago-based combined airline, but the brand will be UAL. The deal is expected to produce $1 billion to $1.2 billion in annual revenue and cost benefits for the combined company by 2013. One-time costs of about $1.2 billion are expected over a three-year period.

The companies expect to complete the transaction in the fourth quarter of 2010.

John Crawley reported late last week that while the deal should pass regulatory muster, the carriers should not expect a Justice Department review to be as swift Northwest’s, which was deliberately timed to be considered by the business-friendly Bush administration.

European airlines merging, U.S. talks to take off next?

airfrance-alitaliaEuropean airline mergers, long expected, are now taking wing.

Air France-KLM in January bought a 25-percent stake in Alitalia after a failed attempt at buying the entire carrier last year. The airline fought it out with Lufthansa, which lost the battle but didn’t sit around moping. It quickly launched Lufthansa Italia, which took its maiden flight a few days ago.

Ryanair, Europe’s largest discount airline, has withdrawn its bid for Aer Lingus after the irish government rejected the $1 billion deal. Ryanair is now expected to look for alternative targets.

British Airways remains in merger talks with Spain’s Iberia. Those talks have become complicated by the pound’s recent slide against the euro, making Iberia’s market capitalization now higher than BA’s.

The 800lb albatross in the room

The logic behind Delta’s purchase of Northwest was based on the price of oil staying above $100 a barrel. This is what the parties sold to unions, shareholders, creditors and politicians when making the case for the deal; the airline industry was going to have to overhaul everything about its business to manage costs.

New high-efficiency jets were going to be rolling off Boeing’s assembly lines, and airlines would have to find billions of dollars to buy them. Yes, prices for carry-on luggage would keep rising, and free in-flight peanuts could become a thing of the past. Worries about an economic malaise derailing vacation plans and choking corporate travel budgets would grow to full-blown fear of the worst recession in generations by the time the Delta-Northwest deal was struck.

The new, larger Delta will be an international powerhouse with unparalleled scheduling and pricing strength with service to 375 cities worldwide, experts said. The company estimates $2 billion in cost savings and revenue enhancements annually from the merger.

Bad News Bear

People enter the Bear Stearns building after JPMorgan Chase & Co said yesterday it was buying Bear Stearns for $2 a share, in New YorkThe aftershocks of Bear Stearns’ collapse are front and center. China’s CITIC Securities is moving on, formally calling off its $1 billion strategic tie-up; JPMorgan is moving in, ditching plans for a new office building now that it owns the $1.5 billion Bear Stearns HQ.

The Federal Reserve — hours away from the most aggressive rate cut in years — is arranging shotgun weddings for failing financial institutions, but policy makers might be running out of eligible suitors. “There may be some potential buyers left, but the list is looking pretty thin,” said Adam Compton, co-head of global financial stock research at RCM Global Investors.

Across the Atlantic, the European Commission said that while it was not asking for job cuts at stricken British mortgage lender Northern Rock, the bank would have to slim down to be a viable business in the future without state support. UK newspapers reported that one-third of staff could be axed.