Northwest Buys Stake in Continental

Northwest Airlines Corp. on Friday bought a controlling stake in Continental Airlines Inc., the first step in creating an alliance between the carriers.

Northwest and Continental will begin code-sharing--booking passengers on each other’s planes as though they were a single airline--on Dec. 12. Baggage will be automatically transferred from one carrier to the other.

The alliance was launched even though the Justice Department filed a civil suit last month asking that Northwest be prohibited from owning Continental stock. However, the lawsuit did not seek a temporary injunction against the alliance or the stock purchase.

Frequent-flier mileage credits good for use on either airline will begin accruing Dec. 6, subject to regulatory approval, and members of one program may request award travel from the other program beginning Feb. 1 for travel beginning March 1.

Northwest also announced changes in its frequent-flier program. WorldPerks miles will no longer expire and members will have nine months of the year, rather than the current 10 weeks, in which to redeem 20,000 award miles for a free domestic flight.

Northwest said it purchased nearly 8.7 million shares of Continental stock from investment group Air Partners and from other investors for $370 million in cash and more than 2.6 million shares of Northwest common stock. Northwest had originally planned to acquire 9.51 million shares, or a 14% stake.

Some partners and affiliates of Air Partners retain ownership of 853,644 Continental shares, but they granted Northwest a limited proxy to vote those shares.

While Northwest’s equity stake gives it 51% of the voting power in Houston-based Continental, Northwest deposited the shares in a trust and said the shares will be voted in the same proportion as the votes of other shareholders for six years.

St. Paul, Minn.-based Northwest also agreed to restrictions on its ability to vote the stock for an additional four years after the trust expires, and it gave up its previously negotiated right to a seat on Continental’s board.

Initially, Northwest will place its code on about 450 Continental and Continental Express daily flights serving 56 destinations. Continental’s code will appear on about 400 Northwest and Northwest Airlink flights to 43 destinations.

Additional code-sharing is planned, subject to government approval.

Passengers with membership in either airline’s airport club lounges will be able to use the other carrier’s lounges starting today.

Northwest shares fell 38 cents to close at $22.69 on Nasdaq. Continental Class B shares were unchanged at $34.75 on the New York Stock Exchange.