UAL/Continental Look To Business To Fuel Merger

May 24, 2010

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United Airlines and Continental Airlines are betting their combined network will appeal to more companies, as demand for business travel rebounds from the 2009 recession.

By many measures, corporate travel is key to prosperity for major airlines and serves as a primary reason why United parent UAL and Continental sought earlier this month to create the world's largest airline.

"This is one of the unheralded, unexposed parts of the business, where the airlines are very eager to become the preferred travel provider for key corporations," said airline consultant Doug Abbey.

Air service accounts for 18 percent, or roughly USD$50 billion, of US business travel spending globally, according to 2008 figures provided by the National Business Travel Association.

IBM, Boeing, General Electric, Exxon Mobil and Lockheed Martin were the top five companies for travel on US airlines in 2008, according to the most recent survey data from Business Travel News.

Airlines closely guard their travel contract information, making it difficult to determine which holds the best deals.

But carriers with the largest presence in key business markets such as New York, Atlanta and Chicago will have an advantage over rivals when negotiating with companies.

"It really is a function of where the demand is for a particular company," Abbey said.

United has hubs in Los Angeles, San Francisco, Denver, Chicago and Washington. Continental has hubs in Newark, New Jersey, not far from New York; Houston; and Cleveland. The merged airline would fly to 370 destinations.

In announcing the proposed merger on May 3, UAL chief executive Glenn Tilton and Continental CEO Jeff Smisek, who would be chief executive of the new United, said the merger would make the combined carrier -- which would be known as United Airlines -- more appealing to corporate travellers.

"A single-carrier network is very attractive to high-yield corporate customers," Smisek said. "By being more efficient we will be even more competitive."

The carriers, which currently have a comprehensive global partnership designed to lure travellers, did not quantify the benefits they expect to receive by way of corporate travel contracts.

According to a Business Travel News survey last November, United and Continental received strong ratings from corporate clients for the strengths of their individual networks, partnerships and frequencies.

Continental also outperformed other major US airlines in other areas that are important to corporate customers, including its power to negotiate agreements, offer options and make decisions regarding price and service.

Service will be an issue pursued on Thursday, when senior executives of United and Continental testify before US Senate committees examining the proposed merger. United and Continental hope for regulatory approval by year's end.

Antitrust experts believe the US Justice Department will clear the deal, since there is little overlap of common routes and there are no shared hubs.

Kevin Mitchell, president of the Business Travel Coalition, said that once UAL and Continental fully integrated and began to realise the more than USD$1 billion in annual revenue and cost improvements they expect, they could pass savings along to companies that hold travel contracts with them.

"The more tightly integrated partners are, the better they can deliver a corporate discount programme," Mitchell said.

"In this case, an all-out merger will allow them to integrate all their sales and all their marketing. That is more attractive," he said.

Vaughn Cordle, managing partner and chief analyst at AirlineForecasts, an airline investment research and strategy company, said about 35 percent of total revenue for major US airlines comes from high-end, well-heeled business travellers, who often pay walk-up fares, fly first- or business-class and spend money on in-flight perks.

He said as businesses ramp up travel in the post-recession era, airlines are poised to collect as many corporate travel contracts as possible.

"It's a good time for corporations to negotiate new contracts," Cordle said.

(Reuters)