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United and Continental discussing alliance

After breaking off merger talks in April, Continental and United have rekindled discussions of a cooperative arrangement. This time, however, the two carriers are considering options that do not include the hassles and headaches of a full merger. Instead, the airlines are looking at an alliance that will allow them to set prices and schedules, according to Theoretically, such an alliance will equip both airlines to compete with a merged Delta-Northwest, which is set to become the largest carrier in the world.

If the concept sounds familiar, it’s because Continental has recently been linked to a similar three-way alliance with British Airways and American. One objective for that alliance would likely also be setting prices and routes, presumably for transatlantic and European routes.

The key to all these deals is antitrust immunity—protection from laws that prevent companies from creating a non-competitive business environment. After the DOT said it would likely grant antitrust immunity to Delta and Northwest (along with several partner airlines), Contributing Editor Tim Winship summed up the implications thusly: “…Permitting airlines to jointly set ticket prices can only have one outcome: higher prices. And it’s the prospect of just such higher prices, not some undefined customer-focused objective, that motivates airlines to band together into global alliances, and to seek antitrust immunity for their joint services.”

One would assume the same to be here, with Continental and United looking for a way to set prices, making both airlines equally competitive with a powerful Delta-Northwest. It seems likely, though, as Winship points out, that any gains the airlines make through this deal will come at the expense of passengers. From a consumer standpoint, the DOT has set a frightening precedent by appearing agreeable to antitrust immunity: If the two airlines are allowed to set prices, why wouldn’t they do so with their own bottom lines in mind?

Before customers panic too much, it should be noted that conversations between Continental and United seem to be at the very preliminary stages. United is still actively engaged in merger talks with US Airways, and Continental is presumably still discussing the proposed three-way alliance.

Still, the existence of these talks, and the mere concept of cooperative alliances, suggest the airlines are actively searching for a way to work together while avoiding mergers. This strength-in-numbers mentality makes sense for the carriers financially—more cooperation leads to less competition and therefore reduced pressure to lower prices—but it doesn’t bode well for consumers. Without natural market forces driving fares down, there’s nothing to keep them from going up.

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