Stephen Foley: Continental merger with United finally flies
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Your support makes all the difference.US Outlook: Barring an unforeseen hiccup, the world will have a new No 1 airline come Monday morning. Finally, some good news for airline shareholders.
Continental and United are said to have agreed a price at which to consummate their marriage, with which they will leapfrog above Delta, which bought Northwest two years ago, in terms of passenger numbers.
The US airline industry has been one of the stock market's tragic jokes, with most of its players seemingly spending as much time in bankruptcy protection as out of it. Even when a booming economy briefly coincided with reasonably low fuel prices, the industry struggled to cover its cost of capital.
This is a tightly regulated and highly unionised industry, but these don't add up to a full excuse for the underperformance. Historically, too many carriers have fought on too many routes across the States, and having decided to hulk a plane up into the air, they have to fight tooth and nail on price to fill enough seats. It's been a boon for travellers seeking bargains; a bust for shareholders.
The Continental-United deal is hardly a game-changer. The pair have been inching closer ever since their failed talks two years ago, hooking up in an alliance that included winning immunity from competition rules for their transatlantic operations. The cost savings from a merger are relatively small, given the sweeteners needed to win union approval and given their complementary route maps. United is strong in the West and out into Asia, Continental is based on the East coast with strong links down to Latin America and it is precisely this the lack of overlap that makes Wall Street think the deal won't attract too much concern from competition authorities.
But the deal does remove the risk that these two will be tempted to compete.It is also another piece of evidence that – and I hesitate to use the phrase – it's different this time. Harsh lessons were learned over the last decade, and existing carriers are loathe to squander the benefits of an improving economy on price wars. Continental's new boss, Jeff Smisek, has already snatched away the free in-flight snacks, and imposed a $25 bag fee, bringing the airline into line with its parsimonious rivals.
Finally, it's better to be an airline's shareholder than its passenger.
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