Heavenly Bliss for United, Continental?

"Continental will propose; United will accept; a marriage made in the heavens."
-- Motley Fool CAPS player Stuckonsocks

That call looks almost prescient today, thanks to a report from Crain's Chicago Business that United Airlines parent UAL (Nasdaq: UAUA  ) has hired Goldman Sachs (NYSE: GS  ) to help in "exploring alternatives," including the possibility of merging with another airline. Continental (NYSE: CAL  ) and bankrupt Delta were named as potential targets.

Would a deal with either airline make sense? Recent history says yes. Consider the acquisition of U.S. Airways (NYSE: LCC  ) by America West last year. Despite my initial concerns, the pair has done well enough to deliver outstanding returns to shareholders. Surely some of that is due to the economies of scale offered by a larger carrier with streamlined operations.

United could benefit similarly, though Continental strikes me as the better partner. Why? Well, for one, the fleets. Continental and United both heavily rely on Boeing (NYSE: BA  ) aircraft. Combining maintenance operations wouldn't be too difficult. Delta, on the other hand, flies 120 MD-88 jets and 16 MD-90 jets, neither of which is in service with United.

Second, Delta's hub in Salt Lake City is regionally indistinct with United's hub in Denver. And both airlines already have significant operations at New York's JFK airport. Meanwhile, Continental's hubs in Cleveland, Ohio, Newark, N.J., and Houston, Texas, would offer United a manageable expansion of its route structure.

But a merger with Continental would hardly be easy. Unions on both sides, rightfully paranoid after years of layoffs, would battle over work rules and seniority lists, among other issues. What's more, Continental still pays a pension to employees. United doesn't. How would that incongruity get reconciled in a merger?

Nevertheless, I find the combination compelling. United would be able to expand both its domestic and international operations without investing heavily in new infrastructure. That, in turn, would stabilize margins, adding some water to a dry moat that's offered little protection from the likes of Frontier (Nasdaq: FRNT  ) , JetBlue (Nasdaq: JBLU  ) , and Southwest (NYSE: LUV  ) in recent years.

Good call, Stuckonsocks. Let's hope someone at United is listening.

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Fool contributor Tim Beyers has 33 picks in his Motley Fool CAPS portfolio, including UAL, which he believes will outperform the S&P 500. He doesn't, however, have real money in the airline or in the stocks of any of the other firms mentioned in this article. What's your take on United? Continental? Get in the game and let us know.

Meanwhile, you can get an inside peek at all the stocks Tim owns by checking his Fool profile. The Motley Fool's disclosure policy is always on time for departure.


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