What Does the Continental-United Merger Mean for You?

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Editor's Note: This story was originally published on May 3, 2010. To see the most recent SmarterTravel articles on related topics, please click on any of the following links: airfare, airline merger, American, AskEd & AnswerEd, Continental, Delta, Ed Perkins, Southwest, United, US Airways.

As rumored, Continental and United announced a merger the day I completed this report. But it isn't really hot news—rumors have been around for weeks, and the two lines courted briefly more than a year ago. The financial press, of course, is all over this. But unless you're a successful stock speculator, you're probably more interested in what such a merger means to you, as a typical flyer. A reporter just posed that exact question to me:

"What effect will the Continental-United Merger have on average travelers?"

The short answer is, "You probably won't notice anything early on; later, you'll see a few routes dropped, more fare increases, and fewer "sales" in the industry." A few weeks ago I examined the merger proposals in a more general way; this time, let's look at the specifics.

Routes and Hubs

Continental and United already fly "almost anywhere in the U.S. to almost anywhere else," so if you live in a midsize to large city, you probably won't see much change. But if you live in a small outlying "spoke" city currently and you now have service from both Continental and United regional affiliates, you may lose flights to one of the hubs to which you how have service.

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Unlike other recent big-line mergers, I don't expect a combined line to drop either line's major hubs. In the case of Delta-Northwest, Cincinnati, about halfway between Atlanta and Detroit, became expendable—or at least downsizable. Ditto St. Louis when American took over TWA and basically concentrated its Midwest service in its Chicago mega-hub. I don't see that here. Continental's strongholds in Houston and Newark are areas where United is weak, and United's hubs in Washington, Chicago, and San Francisco are weak areas for Continental.

Continental and United don't compete directly with each other on any important international routes, so I expect only a modest drop in flights to major international cities. The new line will retain any international nonstops on routes with enough local-origin-and-destination traffic to support one or more flights. But on thinner routes, a combined line might well try to concentrate connecting traffic through one hub rather than two and drop existing nonstops from the losing hub. But on the other side, the combining traffic fed from the two lines might allow the combined line to support a few new nonstop routes.

Although routes probably won't change much, one of the admitted purposes of this and other big-line mergers is to "reduce capacity" in the system. What airlines actually mean, in terms most of us can understand better, is they want to reduce the "overproduction" of seat-miles they can't sell at a profit. And that means fewer flights. I might also say it will mean fuller flights, but flights are already about as full as they can practically get.

Frequent Flyer Merger for Sure

Here's one prediction I'll take to the bank: The combined lines will combine frequent flyer programs as quickly as they can. They'll merge mileage accounts and allow travelers to retain whatever "elite" status they might have on either line.

As to availability of seats, that's a wash. Each line's flyers will have more flight options, but they'll be competing for scarce seats with both lines' travelers. Seat availability is and will remain something the line can control—and will undoubtedly keep seat inventories as tight as they can. Don't look for any improvements. In fact, as the combined line downsizes, seats will probably be harder to get, not easier.

Whither Economy Plus?

One of the more intriguing questions in this merger—one that I haven't seen addressed in any industry speculation so far—is what will happen to United's "Economy Plus" option for extra legroom for a moderate cost? Will the combined line extend the service to all its flights, will it eliminate the service entirely, or will it keep it, but just on former United planes or routes?

To me, Economy Plus is the only significant advantage United has over its giant-line competitors. But no other domestic line has adopted it. Does this mean that United's numbers don't look good, and United has kept it only to save face until a merger? Or do the numbers look good to a combined line? As I said, I haven't heard a squeak about it.

Fares—Up if They Can

Most industry experts concede that the most important reason fostering consolidation among the giant "network" lines is to reduce competition. And that means, in turn, allowing the lines to raise fares. Clearly, the network lines have shown that they can't make a profit through their current operations—only the low-cost lines can seem to do that. They also claim that their recent cost-cutting actions have already "cut all the fat" out of their operations. Salvation, then, is in increasing the fares—and the less competition, the easier it is to raise fares.

Fortunately for many travelers, the low-cost lines can make profits selling low-fare travel, and they'll keep the lid on prices, at least on busy routes. Nevertheless, you can expect to see more upward pressure on fares than you've seen for several years.

Dominoes, Anybody?

Conventional wisdom is that consolidation is the way to go for network lines. With Delta-Northwest and Continental-United tied together, two big network lines remain. And the mavens are already speculating about a third wedding—close to a shotgun wedding—between American and US Airways. For a lot or reasons, these two would be much more of an "odd couple" than either of the two current couples, but stranger things have happened.

Economists tell us—and I agree—that cross-border consolidation makes more sense than further consolidation among large domestic lines. U.S. laws, however, prevent cross-border airline ownership, and those laws aren't about to change anytime soon.

I've even seen speculation about mergers among the low-cost lines. I don't see any obvious good marriages, but they could happen. And we have to keep in mind that Southwest has enough money to buy just about any line it wishes—and maybe all of them!

Strikes—The Big Worry

Although mergers will certainly lead to upward pressures on fares, my real worry about mergers between mega-lines is what might happen in the event one of them went on strike for days or even weeks. The last major strike, on United in 1985, created havoc throughout the nation. Such a strike on a combined line, with almost double United's 1985 market share, would be devastating.

When I raise this issue, merger proponents "remind" me that the Railway Labor Act, governing airline strikes, has avoided lots of potential strike threats. To which I reply, "Yes, but I 'remind' you of the 1985 United disaster.'" I presented this argument in 2000 during testimony before a Congressional committee in opposition to the first United-US Airways merger proposal. And if given the chance, I'd make the same argument on Continental-United.

Not a Done Deal

Announcement is a far cry from accomplishment. Undoubtedly, a merger as large is this will come under scrutiny by the Justice and Transportation Departments, and Congress will probably weigh in, as well. But if I were betting, I'd bet on an eventual merger.

Winners and Losers

As usual in big mergers these days—especially airline mergers—the only guaranteed winners will be the Wall Street financiers and lawyers who put the deals together, short-term stock speculators, and top executives of both lines who will gain some combination of fat pay increases and golden parachutes. Delta, American, and US Airways will win—a little—because of a less competitive domestic marketplace.

The losers? Consumers will lose, mainly through higher fares. Employees will lose as a combined line lops off overlapping jobs. And some cities will lose some air service. And everybody would lose big in a strike.

As noted, if asked, most other consumer advocates and I would oppose this merger. But so far, nobody's asking.

 
 
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