Continental, UAL agree on exchange ratio: source

NEW YORK (Reuters) - Continental Airlines Inc and UAL Corp's United Airlines have agreed to an exchange ratio of 1.05 UAL shares for each Continental share in a deal that would create the world's largest carrier, a source briefed on the matter said.

United's board will meet Friday, while Continental's board will hold meetings on Friday and Sunday to discuss the deal, the source said.

It was not immediately clear what stock price the two sides are using for the ratio or if they were using a volume-weighted average. The carriers had been at odds over price as Continental wanted to use the unaffected stock price, or the price before news of the talks first broke. United wanted to use a more recent price.

UAL shares have risen 17.7 percent since April 7, when news of its merger talks with US Airways broke, and Continental shares have risen 13 percent. United's talks with US Airways ended last week.

UAL shares were up 3.7 percent at $22.25 in Friday morning trade while Continental shares were up 1.8 percent at $23.11.

Under the terms being discussed for the all-stock merger, UAL Chief Executive Glen Tilton would become chairman of the combined carrier while Continental CEO Jeff Smisek would become CEO of the airline.

The combined carrier would operate under the United brand name and would be based in Chicago, sources have previously told Reuters.

United declined comment. Continental was not immediately available for comment.

The two airlines restarted merger talks in April, two years after walking away from almost sealing a deal. Continental's board voted down a similar plan two years ago, but industry experts have said an approval is more likely this year because UAL is in better financial shape.

UAL posted a narrower first-quarter loss of $82 million, compared with a year-earlier loss of $382 million. Revenue rose 15 percent to $4.2 billion.

Many airline executives have called for consolidation, saying it is a necessity to allow the industry to return to profitability.

Airlines, struggling with high fuel prices and a pullback in consumer spending amid a weak economy, have lost $50 billion in the past 10 years, according to the International Air Transport Association.

The industry lost $11 billion in 2009 alone.

Still, Continental has long said it would prefer to remain independent. But at a conference in March, CEO Smisek said the company would "bulk up defensively" if it would be in its best interest.

(Reporting by Jui Chakravorty, editing by Gerald E. McCormick, Phil Berlowitz)