Transcripts

United Tries To Land A Merger Deal With Continental

PAUL KANGAS: A flurry of activity in airline stocks today as talk heats up once again on possible consolidation in the industry. Today it's published reports that United Airlines and Continental are talking and news that Midwest Airlines has rejected a buyout offer from Air Tran. Last month, U.S. Airways started talking with Delta about a buyout offer. But as Washington bureau chief Darren Gersh reports, industry observers say talking is the easy part.

DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: The flurry of airline merger talks is beginning to look as complicated as those route maps in the back of an in-flight magazine. Now it's United and Continental that are reportedly talking, even though a pre-existing deal lets Northwest block most bids for Continental. And analysts say Continental is happy flying solo.

PHILIP BAGGALEY: Continental feels they can compete now on their current basis. That might change though if several of the other big carriers get together. They may feel it necessary at that point to enter into a merger, even if that wasn't their first choice.

GERSH: United and Continental's routes would pair up neatly. It's the balance sheets that are messy. Borrowing to finance a merger would boost the two carriers' debt-to-revenue ratio well above their current levels which now top 100 percent. By comparison, Southwest's debt- to-revenue ratio is just 43 percent. And the price of doing any airline deal may soon be going up. Midwest Airlines announced it is rejecting an $11.25 a share buyout offer from Airtrans. Analyst Ray Neidel says this may not be the right time to do any deal.

RAY NEIDEL: All the airline managers right now are looking at a strong economy, strong demand, a good 2007 and that they want to be there with the recovery of the industry and they think that their enterprises would have more value once they prove that they could earn good profitability next year.

GERSH: But talking about a merger now does send a message to airline workers eager for their share of next year's profits.

CLIFFORD WINSTON: Airlines might be signaling to labor forces that we're interested in keeping our labor costs low and if you're going to make it difficult for us in future negotiations we will seek a merger and try to strike a deal with the other labor force so to speak and we'll get rid of some of you.

GERSH: And that may explain why the International Association of Machinists says it is fully prepared to defend the wages of its members, no matter what airline they work for. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.