Air Canada to partner with Continental to provide enhanced service to U.S.

By Ross Marowits, The Canadian Press

MONTREAL - Air Canada (TSX: AC-B.TO) plans to partner with Continental Airlines, the fourth-largest U.S. carrier, to provide enhanced service to the American market.

Canada's largest airline announced Thursday that the agreement in principle, which is subject to regulatory approvals, will provide customers a broader network of destinations, frequent flyer benefits and lounge access.

"This is an exciting opportunity for Air Canada and Continental Airlines to develop a deeper relationship that will be of great benefit to our customers," stated Ben Smith, Air Canada's chief commercial officer.

"At the same time, we will be able to realize greater efficiencies so we can compete more effectively. It is one of the many innovative ways we are responding to the high cost of fuel, by working with alliance partners for the benefit of our customers."

Air Canada already has an agreement with United Airlines, which is a Star Alliance partner. Continental (NYSE: CAL) announced in June that it also plans to join the alliance after exiting its current partnership with Sky Team.

The transfer could take months to complete because Continental can't terminate its contract with Sky Team until nine months after the closing of the proposed merger between Delta and Northwest, Continental said in June.

Under the new partnership, Canadian travellers will have access to more destinations in the eastern United States, through Continental's hubs in Newark and Cleveland. Enhanced access to the southern U.S., Mexico and Central America will be directed through its Houston hub.

Continental has said its route network has little overlap with United's.

Air Canada has also signed a framework agreement with Continental, United Airlines and Lufthansa to create a transatlantic joint venture to provide service to Africa, India, Europe and the Middle East.

Nine Star Alliance carriers, including Air Canada, have filed a joint application to the U.S. Department of Transportation to add Continental Airlines to their existing antitrust immunity.

Versant Partners analyst Cam Doerksen said the agreement with Continental was an expected result of the U.S. carrier's desire to join the Star Alliance.

"Continental has an extensive network in Central America and other parts of the U.S. where perhaps United doesn't have the same type of coverage so I just think it opens more opportunities for Canadian travellers to fly to more destinations," he said in an interview.

Established in 1997, Star Alliance's 20 airlines regional partners around the world offer nearly 18,000 daily flights to 965 destinations in 162 countries.

Continental provides 3,1000 flights a day to more than 280 U.S. and international destinations. It has more than 45,000 employees.

On the Toronto Stock Exchange, Air Canada shares gained 25 cents or 4.68 per cent to $5.59 in midday trading. The shares have fallen by more than 60 per cent in the past year.