United-Continental closeness questioned

Chicago —- Will they or won’t they?

The curiously close alliance of United and Continental Airlines is likely to keep tongues wagging throughout 2009 as analysts, employees and competitors try to figure out whether the carriers are reinventing the way airlines partner with each other or are laying the groundwork for a merger.

Most airlines of any size have code-share agreements that let them sell seats on competitors’ flights, a strategy that boosts their revenue while giving passengers a greater range of flights and destinations.

But Chicago-based United and Houston-based Continental are seeking greater breadth and depth than that, taking their code-share arrangement global while working together to cut costs and share ground operations in ways that don’t run afoul of antitrust restrictions.

“What we’re doing with Continental is new and going to a place we haven’t gone before with any of our partners,” said Michael Whitaker, United’s senior vice president for alliances, international and regulatory affairs, who heads the team of United employees involved in the massive project.

The end result, linking operations so passengers move easily from one carrier to the next, won’t be evident until the fourth quarter of 2009. That’s when Continental will formally drop out of SkyTeam, its current marketing alliance, to join United and its Star Alliance partners.

But much of the work under way, from linking frequent-flier programs and computer systems to sharing airport lounges, would be tackled at the outset of any merger, analysts note.

Sources close to the carriers caution that a trip to the altar is unlikely any time soon.

For now, executives at the two airlines have their hands full managing in an exceptionally volatile environment, replete with a record falloff in passenger traffic, seesawing fuel costs and growing labor discord.

Given the credit squeeze, the carriers can’t turn to Wall Street for the $1 billion or more in financing needed to cover their merger costs, analysts said.

That makes close alliances airlines’ best hope of capturing some of the cost savings and new revenue they would gain by combining their networks and, thus, keeping pace with Delta and Northwest Airlines, which merged this fall to form the world’s largest carrier.

“Financing a transaction in this credit environment would be very difficult,” said United Chief Executive Glenn Tilton, a vocal proponent of airline mergers.