United and Continental Airlines will merge to form the world's largest airline, the two companies said Monday.

A United Airlines plane taxis toward a runway at George Bush Intercontinental Airport on April 27 in Houston, six days before United announced it would be merging with Continental Airlines. (David J. Phillip/Associated Press)

The new company would be the largest carrier in the world, exceeding current leader Delta Air Lines in size. Under the terms of the deal, the line's planes would carry the United name but fly adorned with the Continental colours and a variant of the Continental logo.

The deal will be largely a stock transaction, with Continental shareholders receiving 1.05 shares of United stock for every Continental stock they own. That would put the price tag of the deal in excess of $3 billion US.

The airline will be run by current Continental CEO Jeffery Smisek. United CEO Glenn Tilton, a longtime advocate of consolidation in the airline industry, will be chairman for up to two years while Smisek prepares to take over as chairman after that.

The deal will first need approval from shareholders and antitrust regulators and is expected to close in the fourth quarter.

The new parent company, United Continental Holdings Inc., will be based in United's hometown of Chicago but have its biggest hub in Houston. The companies say the combined airline will have revenue of about $29 billion, and $7.4 billion in unrestricted cash.

Annual savings

The companies said combining would save them $1 billion to $1.2 billion a year by 2013. That includes between $800 million and $900 million of new annual revenue, partly from increased international service.

Owners of United parent UAL Corp. will hold 55 per cent of the combined company, leaving Continental Airlines Inc. shareholders to own the rest. Continental shareholders will get 1.05 UAL shares in exchange for each one of theirs.

Combining Continental and United would leave the U.S. with three big international airlines — the new United, Delta, and American Airlines. US Airways Group Inc. also flies internationally, but its 2009 international traffic was less than one-third that of American's.

United is the United States' third-largest carrier by traffic. Continental Airlines Inc., in Houston, is the fourth-largest.

The new entity would be the largest carrier in the United States and in the world, eclipsing Delta Air Lines. Delta became the largest U.S. airline when it purchased Northwest airlines in 2008.

It also comes on the heels of merger talks between United and US Airways that fizzled earlier this month, reportedly because of difficulties surrounding integrating their unionized work forces.

Key asset

United and Continental first discussed linking up in 2008, but the two sides backed away because of their respective negative financial positions at the time.

One of United's key assets has been its Pacific routes, which it bought from Pan-Am in 1985. It was already the biggest carrier in the U.S., and the Pan-Am deal made it a major international carrier for the first time.

Continental jumped in size in 1987 by swallowing Frontier, People Express and New York Air.

Both airlines shrank to cope with the recession. United cut capacity 7.4 per cent last year, and Continental shrank 5.2 per cent.

Both have also been losing money. Continental reported a 2009 loss of $282 million as revenue plunged 17.4 per cent to $12.59 billion. UAL lost $651 million for the year as revenue fell 19.1 per cent to $16.34 billion.

The merger is the latest incident in a round of consolidation within the sector to deal with lower revenues. Earlier this month, British Airways and Spanish carrier Iberia merged to create one of the world's largest airline groups. That pact is expected to save the combined company $530 million annually.

With files from The Associated Press