United, Continental Team Up

June 19, 2008— -- The airline industry did a little more reshuffling today, with Continental and United announcing plans to link their networks through a new alliance.

It's not quite a merger, but some see this as the first step toward the two airlines joining forces.

As oil prices have skyrocketed in the past few months, most major U.S. airlines have struggled to remain profitable. Fuel costs for the airline industry are expected to jump $20 billion, about 50 percent, to $61 billion this year.

To help offset any losses, most of the big airlines — including United and Continental — have announced large cuts in service, eliminating unprofitable routes.

"It's no surprise. I was expecting it," Ray Neidl, an airline analyst with Calyon Securities, said of today's announcement. "The two have a very complementary system. Down the road, I'm expecting a merger but it's not any time soon."

"It's going to be good for both companies," he added.

Neidl said the two airlines will first work on getting their computer systems talking together, which is often a major stumbling block when airlines merge.

Continental will also remove itself from its membership in the SkyTeam alliance and join with United's Star Alliance.

Through SkyTeam, Continental has been partnered with Delta, Northwest and other airlines. Delta and Northwest are in the process of merging.

By joining with United's Star Alliance, Continental passengers will have easier connections with United and US Airway flights and be able to earn or use frequent flier miles on alliance airlines and have reciprocal lounge access.

Continental will be the 21st airline in the alliance, which also includes Air Canada, Lufthansa and Singapore Airlines.

"There is significant value gained from linking with larger networks to provide truly national coverage and expanded global reach, and exploring new ways to reduce costs and improve efficiencies," Larry Kellner, chairman and CEO of Continental, said in a statement. "As we experience some of the most challenging conditions airlines have ever faced, we look forward to the benefits of a new relationship with United and the other Star Alliance members."

The alliance may take months to implement.