Experts disagree on effects of airline merger on consumers

Analysts agree that the Continental and United Airlines merger is a great business deal, but they're not so unified when it comes to what the deal will mean to consumers.

"It's a good move - a huge benefit for both United and Continental," said Robert Herbst, airline analyst with AirlineFinancials.com. "If I had to pick one big winner, it's United Airlines."

United Airlines has agreed to buy Continental in a $3 billion-plus deal that would create the world's largest carrier with a commanding position in several top U.S. cities. The company will continue to be headquartered in Chicago.

The new United would surpass Delta Air Lines in size, which should help it attract more high-fare business travelers. It will fly to 370 destinations in 59 countries.

The appeal to business travelers also will likely mean good things for them, analysts said, but it could still mean higher fares for everyone and fewer perks for occasional fliers.

Analyst Robert Herbst is one who believes fares will go up - and should go up.

"This needs to happen. The airline industry is not healthy," he said.

The merger won't happen overnight, and, with United shareholders getting a majority stake, it will get a hard look from shareholders and unions alike. Still, Herbst said he expects it will happen eventually, and as a result, fares will catch up with inflation over the next year or two.

Terry Trippler, however, an airline expert with the airlines-focused website rulestoknow.com, disagrees that rates will rise and says the deal blends different strengths of United and Continental.

"You take Continental, known for its in-flight service, and United, known for its innovative ideas and put them together, under the leadership of Jeffrey Smisek (Continental CEO), and I think it's going to be good for the consumer," Trippler said. "There will be nothing but positive impact."

Trippler believes fares may go down as a result of the deal. He said Delta is going after the same customer and will want to stay competitive. There will be a lot at stake to fill the flights, he said.

"People may be surprised when these giants start to battle against each other," he said.

The new parent company will be called United Continental Holdings Inc., and have about $29 billion in annual revenue based on 2009 results and $7.4 billion in unrestricted cash. The airlines said combining would save them $1 billion to $1.2 billion a year by 2013, including between $800 million and $900 million in new yearly revenue.

The deal would create a giant with major hubs in key domestic markets including New York, Los Angeles, Chicago, Houston and San Francisco and an international network stretching from Shanghai to South America.

Smisek will head the new airline, but United CEO Glenn Tilton, a longtime advocate of consolidation in the airline industry, will be non-executive chairman for up to two years before Smisek adds the chairman title.

Wall Street has pushed consolidation as a way to let airlines raise fares by reducing the number of flights and seats. Antitrust regulators are likely to scrutinize the deal for its effect on fares, but Smisek and Tilton said even a larger United won't have power to boost prices because other carriers might undercut them.

"There is no carrier in the world that can set airfares," Smisek said. "We couldn't set airfares before this. We can't set airfares after this."

Analyst Jerry Glass agrees that prices will not climb, mainly because of the continuing competition from smaller carriers offering lower prices.

"The low-cost carriers are entrenched in the major markets and as long as they're out there, prices are not going up," said Glass, president of F&H Solutions consultancy firm.

The other aspect expected to improve in the deal announced Monday is more routes and less transfers for the business traveler.

"Long-term, this should drastically improve service," Herbst said. "For the business traveler, it will be a bonus."

Labor issues have often been messy in airline consolidation. Smisek and Tilton said they had briefed their unions on the deal. Both companies said their boards had approved the transaction unanimously, which would include a labor representative on the UAL board.

Pilots at both airlines are represented by the Air Line Pilots Association. People briefed on the negotiations said the two groups have not started negotiations on a joint contract.

The machinists' union, which represents 16,000 workers at United and more than 10,000 Continental employees, said it was concerned about the impact of the deal on pensions, benefits and job security.

Continental shareholders will get 1.05 UAL shares in exchange for each Continental share.

The companies expect to close the deal in the fourth quarter.

Officials for the two airlines said it was too early to know what the impact of the deal would be on their 10 hub airports, which stretch from Newark, N.J., to Guam. They said they will eliminate some headquarters jobs in Houston and Chicago, but gave no numbers.

Associated Press contributed to this story.

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<ul class="links">

<li><a href="/story/?id=378030">Traveler Q&A about the United-Continental deal<span class="date"> [5/4/10]</span></a></li>

<li><a href="/story/?id=378034">How does airline merger play out with O'Hare's western terminal? <span class="date"> [5/4/10]</span></a></li>

<li><a href="/story/?id=377799">United, Continental have a deal on $3 billion merger <span class="date"> [5/3/10]</span></a></li>

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