United/Continental Merger Would Boost Fares

April 30, 2010

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A merger of United Airlines parent UAL and Continental Airlines would be an explosive development for the airline industry, but its impact on fares could be imperceptible to the travelling public for months to come.

The two US airlines are in the final stages of closed-door merger talks that may conclude with a deal announcement as early as Sunday, sources say. A merger would create the world's largest airline, presumably with lower net costs and strategic advantages in the hyper-competitive airline business.

It also would remove excess service on some routes, giving a merged carrier leverage to raise ticket prices. Experts agree that higher fares are inevitable, but it won't happen overnight and other factors could blunt the impact on travellers.

"It's not necessarily good for consumers, but that remains to be seen," said airline consultant Robert Mann. "There's still a lot of price discipline out there from the low-fare carriers."

Sources say the combined carrier would operate under the United brand and be based in Chicago. Neither airline has commented or even acknowledged the talks.


The airline industry, which suffers from razor-thin profit margins, has struggled to boost fares this year despite widespread capacity cuts in 2008 and 2009. Those cuts might have given them renewed pricing power were it not for an economic recession that drained travel demand.

Doug Parker, chief executive of US Airways, which last week called off its own merger talks with United, said the airline industry is in serious need of pricing power and that all US airlines would benefit from less competition and lower airline capacity.

"A transaction between UAL and Continental would be good for the airline business," Parker said.

Data from FareCompare show that air fares of 2009 were at 10-year lows as the airline industry wrestled with the recession.

Rick Seaney, chief executive of FareCompare, said higher fares are sure to result from the combination of UAL and Continental, which would leapfrog current leader Delta Air Lines in terms of traffic.

"One of the biggest drivers of airline ticket prices is competition," Seaney said. "Any time you take a major player like Continental off the board, the bottom line is that prices are going to go skyward. It's just simple supply and demand."

Air fares were poised to move up anyway, Seaney said, because demand is improving after last year. "The question is how much," he said.

Price increases could hit smaller and regional markets harder as discount airlines such as Southwest Airlines will help limit fare rises in larger markets, Seaney said.

"In the bigger cities where the low-cost airlines have a pretty good presence, usually the top 60 or 70 cities, basically they're going to keep what will be the four network airlines honest, to some degree," Seaney said.


Experts agree that a major airline merger would support fares, but by how much and how quickly is still in debate. It depends in large part on how much capacity United and Continental remove from their combined system.

Furthermore, it could take several months for the two airlines to blend their flight schedules.

Joe Schweiterman, a transport expert at DePaul University in Chicago, noted that the impact on consumers could also be muted by the fact that low-cost carriers such as Southwest and its peers still keep industry-wide fare increases in check.

"The days of worrying about cartel type dominance is over," he said. "There are just too many discount carriers now.

Schweiterman said that any impact a merger has on fares could be imperceptible to many travellers.