Monday, May 3, 2010

United and Continental: What the Merger Means

Now that the will-they/won't-they dance is over, and the straight-up merger of United Airlines and Continental Airlines is agreed in principle, what will it mean? To the airlines? To the unions? To U.S. government regulators? To travelers?

For the companies: They will survive to fly another day, gaining greatly expanded route networks, realizing economies of scale by becoming the world's largest airline by passenger traffic and saving money by running one frequent-flier program, one advertising compaign, one reservations system and so on. As you may have heard by now, the merged company will be called United, will be headquartered in United's hometown of Chicago, fly white Continental-style planes and be run chiefly by Continental's strong top management team. CO, like UAL, has downsized with a vengence in recent years, battered by Sept. 11, volatile fuel prices, SARS and swine-flu fears, security scares and the Great Recession. Getting bigger and stronger will help the new company compete. Barring major delays, the deal could go into effect by the end of 2010.

For workers: a promise of no involuntary layoffs - though it's hard to see how that will hold up when duplicated jobs in the present, separate companies are accounted for. Management may struggle to seamlessly integrate two seniority systems and two pay scales. Unions are keeping a wary eye out for layoffs or frozen pensions and pressure to provide additional contract concessions.

For government regulators: The Obama administration promises to be more gimlet-eyed on antitrust matters than the Bush administration was when it quickly approved the 2008 merger of Delta Air Lines and Northwest Airlines. Still, CO and UAL complement each other. Continental is eentrenched in its hubs in Newark and Houston, in Latin America and across the Atlantic to Europe. United is strong on Asia-Pacific routes and at its hubs in New York, Los Angeles, Chicago and San Francisco. They don't duplicate each other a great deal, and they promise no loss of service. We'll see, but that could encourage regulators to give the merger a green-light.

Most important of all, what does a new world's largest carrier mean for air travelers, both in the United States - home of these two carriers - and internationally?

For travelers, the merger could accelerate a trend toward higher fares that has already begun, albeit quietly and gradually. Passenger demand has been strong since late last year; that's having an upward effect on fares. That will continue, though fares may not go significantly higher in the short-term. 2011 could be another story, but aggressive low-fare carriers like Southwest and JetBlue should keep fares from shooting sky-high, especially in competitive major markets.

Elsewhere, cost-reductions and the diversification of annoying (for travelers) but profitable (for airlines) fees for things like in-flight meals, extra leg room and checked bags are putting pricing power back in the hands of airlines. This increases the overall cost of flying or consumers. There will be some consumer-friendly synergies, too, however, such as shared frequent-flier plans and shared access to airport lounges. Some of this, too, is already happening with CO and UAL, who are partners in Star Alliance, where they cooperate on marketing, scheduling and code-shares.

In short, nothing too startling is likely to happen following the merger of these two airlines - except possibly to push other carriers into mergers, too. American? Do you read me? US Airways, are you listening? The U.S. Big Six legacy carriers are giving way to the U.S. Big Four, and a U.S. Big Three may not be too far off. Most airline executives and aviation pundits think that's a good thing in a typically money-losing industry that has too many seats chasing too few customers. At the very least, airline mergers should help the bottom line for the survivors - and it shouldn't cause any great hurt for travelers.

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