United and Continental to Merge — Will We Care in Twenty Years?

I spent the better part of last evening and this morning trawling through a variety of our historical flight and airfare databases, trying to make heads or tails out of the imminent merger between United and Continental.

For starters, it appears the merged brand will be called United and will remain based in Chicago (Continental is Houston-based). I am sure losing the Continental identity was a bitter pill for the carrier’s long time employees to swallow, but those that survive consolidation “synergies” in this mega-merger will potentially benefit from a financially stronger company.

There is a bit of debate on claiming the “world’s largest airline” title. In my book, however – using the yardstick of consolidated revenue passenger miles (meaning, domestic and international) – the newly merged United jumps over Delta and into first by place by approximately 11%, based on Q1 2010 filings – presuming it sails through antitrust scrutiny.

I wanted to see if there were any “loser” cities in this merger and did some analysis on domestic route overlap, and the data shows hardly any overlap except in their respective hub cities – which won’t change the playing field much. On the flip side, internationally there is plenty of destination overlap but hardly any nonstop route overlap.

It is interesting to note that Delta currently services 63 countries outside the U.S. while the newly merged United would serve 54. Looking at the international city breakdown, however, shows a different story – with Continental already serving more international cities than Delta, primarily with its exposure to Europe, Mexico, the Caribbean and Latin America.

On the question of whether domestic airfare prices will rise strictly because of the merger, I would have to speculate that the answer is “no” in the short term, given the lack of significant nonstop route overlap. That said, domestic ticket prices have nowhere else to go but up compared to last year – especially if fuel continues to rise (a $1 difference in the price of oil per barrel can mean as much as $40 million dollars or more in lost profit).

What is more likely to happen as airfare prices increase off those decade lows we saw last year at this time is that smaller U.S. cities – those outside the top 100 cities covered by at least one low cost airline – are likely to bear the brunt of continued system-wide airfare hike attempts as supply and demand swings into the airlines favor and a lack of competition that tends to exert downward pressure on ticket prices will only benefit those in larger cities.

Interestingly I just got back Thursday from the US Airways media day and was struck by the presentation from their CEO, Doug Parker, who made a very thoughtful and compelling argument for airline consolidation (regardless of US Airways penchant for not finding a seat when the melody stops during the game of “airline merger musical chairs”).

The crux of his consolidation argument is that combining into a large carrier inoculates an airline, to a degree, from the craziness of $147 per barrel oil and junk mortgage-induced recessions by having a vast hub and spoke network with a few crown jewel hub cities, which can guarantee a continuous strong revenue stream.

Plus, mergers inoculate carriers against the worst of times, like accidents and “under wear bombers” – since the bigger and financially stronger merged airlines can weather such adversity more easily than a smaller carrier.

I get the argument — network legacy airlines in lock-step have systematically downsized seat supply in recent years (after a decade of subscribing to the grow-at-all-cost model) and have run headlong, through no fault of their own into plagues that would make Moses blush.

Now, with this latest linkup, legacy airlines have traded in this “grow or die” song and started tap dancing to a “merge or perish” tune.

Compelling as the consolidation argument may be, airline mergers are not going to make air travel cheapskates happy in the long term as competition (or the lack thereof) is a key force in keeping ticket prices down – nor will it make airline employees happy, as they know exactly what the code phrase “synergies” means.

With this latest merger between United and Continental, it is pretty apparent that network airlines have ripped the “too big to fail” page out of their urban dictionaries as two different airlines will have relinquished the highly coveted “world’s biggest airline” moniker in successive years.

So maybe it is time for network airlines to consolidate and we consumers cross our fingers that low cost airlines keep these mega -network airlines honest – at least in the bigger cities served by LCC’s, leaving those in smaller cities in the lurch with a 4 hour commute if they want at cheaper airline ticket.

As a consumer-side advocate, airline mergers make me wince, but I have to admit that back when I graduated from college, we had the Big 8 accounting firms – and over the years they merged or died into the Big 4 – and for the life of me I can’t really tell the difference (I wonder what consumers of those firms would have to say?).

Specifically there are going to be some pretty big issues to resolve in the UA/CO linkup as both airlines use completely separate reservation system providers (unlike Delta and Northwest) and are going to likely be branded United – whose web presence has not so affectionately been known as United-Dot-Bomb by hardcore flyers. Not to mention some possible infighting on whether or not seven hub cities is the right number and the customary gnashing of teeth around combining the loyalty award programs.

On the bright side, the new United will not have to deal with loyal Continental customers who were recently transitioned to the Star Alliance (from SkyTeam — the same as United) and were used to getting free meals on most domestic flights (which Continental jettisoned last month).

On the transparency side – at least they both charge the same amount for 1st and 2nd checked bags. And don’t forget, United promised Senator Schumer they wouldn’t charge for carryons…

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Published: April 30, 2010