CHICAGO — United Airlines and Continental Airlines Inc. are on track to close a merger on Oct. 1 that would create the world’s largest airline based on passenger volume, after shareholders endorsed the union Friday.
Houston-based Continental shareholders overwhelmingly approved United parent UAL Corp.’s $3.2 billion all-stock purchase at a meeting in Houston, while Chicago-based UAL shareholders did the same at a meeting outside Chicago.
The U.S. Justice Department, which regulates antitrust rules, cleared the deal Aug. 27 after the airlines agreed to give up some slots at Newark Liberty International Airport to Southwest Airlines. The European Commission has also signed off on the deal.
The carriers first announced their intention to merge on May 3 in a move aimed at bolstering revenue, lowering costs, and improving their competitive position. The merged company will retain United’s name and Chicago headquarters, although Continental chief executive officer Jeff Smisek will lead the airline. UAL CEO Glenn Tilton will serve as a non-executive chairman.
“There is much work ahead as we bring these two companies together, pulling the best from both of our companies, and building on the work we have each done to strengthen our airlines,” Tilton said in a statement.
Potential network changes and other operational details won’t be known for some time. As a result, the longer-term impact remains uncertain for airport credits and for such revenues as passenger facility charges and landing fees that go to repay general revenue bonds and other airport-related borrowing.
Leaders at both airlines told members of Congress during a hearing in June that communities would not lose airline service because the two carriers’ routes have limited overlap. Still, some elected officials and industry members note that the purpose of airline consolidation is to cut costs and improve profits, so some reductions, even if minimal, can be expected as operations are merged.
A brief released by Airports Council International-North America in May said small communities experienced service cuts following the Delta Air Lines 2008 merger with Northwest Airlines, but very few airports lost service outright.
Rating agencies and investors have said while they see the merger having limited impact on airports because the airlines operate complementary routes, it could escalate pressure on other airlines to consolidate. That could cut into passenger volumes and lead to an erosion of airport liquidity and debt-service coverage ratios.
The greatest credit risk posed by the merger is to secondary airport hubs operated by the two carriers and to airports where the two represent more than 30% of flights, according to Moody’s Investors Service. The airlines account for more than 30% of passenger travel at just 13 airports, including most of their hubs.
United operates its major hubs at Chicago’s O’Hare International Airport, where it accounts for 48% of passengers; Denver International Airport, also with a 48% share; Los Angeles International Airport, with 15%; San Francisco International Airport, with 44%; and Washington Dulles International Airport, with 36%.
Continental operates hubs at Houston International Airport, where it represents 72% of passengers; Newark Liberty, where it represents 40% of passengers; and Cleveland Hopkins International Airport, where it represents 65% of passengers.
United emerged from Chapter 11 in 2006. In the bankruptcy, the airline challenged repayment of $1.1 billion of its $1.6 billion of special facilities debt and was able to settle for reduced payments with bondholders on some of it. Denver refunded $270 million of United bonds in 2007. Continental has borrowed more than $1.5 billion of new-money or refunding special facilities revenue bonds since 1998 in 10 issues for projects at various airports, according to Thomson Reuters.
