The US Department of Justice's (DOJ) decision to mount a legal challenge to the proposed purchase of a 14% stake in Continental Airlines by Northwest Airlines throws a question mark over the future shape of the alliance. Continental Airlines insists it will pursue the pact and that the two airlines will remain "vigorous competitors", despite the DOJ's parallel investigation into the commercial side of the deal.

It was the proposed Continental-Northwest partnership, announced at the beginning of the year, that threw the rest of the US majors into a frenzy of matchmaking. Since then, however, the Delta Air Lines-United Airlines alliance has fallen prey to pilot union opposition and the American Airlines-US Airways partnership has implemented only a reciprocal frequent flyer plan.

Continental says the DOJ is not challenging its planned alliance with Northwest, but continuing to investigate "certain specific aspects" of the deal. The airlines have agreed with the DOJ not to discuss the specifics of the suit, but Continental's general counsel, Jeff Smisek, says:"Justice appears not to like the fact that a decade from now Northwest will take control over Continental." The proposal is for Northwest to acquire 14% of Continental's stock and 51% of its voting rights.

Northwest has agreed to make three changes to pacify the DOJ. It has extended the independent status of Continental's board from six to 10 years; accepted restrictions on how it votes its stock; and dropped plans to appoint a nominee to Continental's board of directors.

The airlines say the suit will not delay their plans, that the equity transaction will be completed shortly, and that they will "-vigorously defend themselves" against the suit. Still, Smisek admits that the litigation could continue "-for many years to come".

Source: Airline Business