By Rick Newman
Posted: May 4, 2010
Corporate mergers are always touted as a win-win—especially in the airline industry, where an excess supply of seats has been gutting profitability for years. The new deal between United and Continental, if approved by regulators, will create one huge airline, called United, that serves 370 cities and, in theory, has a better chance of being profitable than either standalone airline. That would be a novelty in an industry more accustomed to losing money than making it.
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But the "synergies" that supposedly make mergers worth the trouble also mean cuts in redundant overhead (often referred to as jobs), as well as service reductions in some cities. There's relatively little overlap between the United and Continental route maps, which means there might be less disruption than, say, a United-U.S. Airways merger would have caused. The two carriers say that the majority of the savings—which could total up to $1.2 billion—will come from new revenue, as the new carrier attracts more customers and broadens its international network. But there will still be a few hundred million dollars worth of cuts that will come from consolidating service, streamlining hubs, and cutting wherever there's overlap. I spoke with Seth Kaplan of Airline Weekly to identify these cities likely to be most affected by the merger:
Cleveland. The mid-sized Ohio town is a Continental hub, with more than 3,000 jobs linked to the airline's presence. But the combined carrier will most likely use United's Chicago hub for connecting cross-country flights, while scaling back significantly in Cleveland. That's what happened in St. Louis when American took over TWA, and in Cincinnati when Delta and Northwest merged. For Clevelanders, that means there will be far fewer Continental nonstops to other cities, with more connections via Chicago, Newark, Denver, or Houston. But there could be a silver lining. "When a hub goes away, fares typically go down, not up," says Kaplan. That's because discounters are more likely to show up, knowing they won't have to battle an entrenched carrier defending a "fortress hub."
Newark. This is Continental's East Coast hub, and a gateway to many overseas destinations. As with every city served by both carriers, check-in counters, baggage service, and ground staff will be consolidated into one operation. United's presence at Newark is small, so the job losses should be minimal. And while the new carrier would have more than 50 percent market share in Newark, that probably won't drive up fares, since plenty of discounters and other airlines will still fly out of nearby airports. Fliers might notice fewer overall flights to United hubs in Chicago and Denver, since that's mainly where United flies to from Newark. Reducing the number of unused seats between the two carriers' hubs is one way the new airline will cut costs and free jets for other, more profitable routes. But if the new United expands its international network as it plans, there could be more overseas flights from Newark.
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Washington. Dulles International Airport in the D.C. suburbs is United's East Coast hub. Continental operates few flights out of Dulles, so little consolidation of domestic flights is likely. But the new carrier might consolidate a few overseas flights originating at the Dulles and Newark hubs. There are more than a dozen overseas cities that Continental serves from Newark and United serves from Dulles, including London, Paris, Frankfurt, and Beijing. It might make sense to pare a few of those flights or route Washington fliers through Newark, or vice versa.
Chicago. United operates a megahub at Chicago's O'Hare, which will absorb the small number of flights Continental runs from there. Fliers might discover less-frequent service and higher fares to Continental hubs like Newark, Cleveland, and Houston, as the new carrier cuts back on duplication.
Houston. United's tiny operation here will be rolled into Continental's big hub. Continental already controls 62 percent of Houston Intercontinental, according to the Transportation Dept., and adding a few United flights probably won't push fares any higher in most markets. But there could be fewer flights and higher fares to United hubs like Chicago, Denver, Los Angeles, and San Francisco.
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Los Angeles. United has a big presence here, with about 190 daily departures, but LAX is also Continental's fourth largest domestic destination. Those flights will be rolled into United's hub. That could mean fewer flights and higher fares to the Continental hubs of Houston, Newark, and Cleveland, plus the two destinations where both carriers offer nonstops: Honolulu and Kahului, Hawaii.
San Francisco. United is the biggest carrier flying out of San Francisco, with Continental operating just a few flights. As with Los Angeles, there could be higher fares and fewer flights to Houston, Newark, and Cleveland. But there could also be more overseas service if the new United builds its international network according to plan.
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Philadelphia, Charlotte, Miami, Dallas, Phoenix, Atlanta, and Seattle. These cities won't be directly affected by the United-Continental merger—but they might feel some blowback as the industry adjusts to a huge new player. The merger leaves U.S. Airways (with hubs in Philadelphia, Charlotte, and Phoenix) and American Airlines (with hubs in Miami and Dallas) without a merger partner of their own, and some analysts feel that those two carriers could suffer from lack of scale and pricing power. So more mergers might be coming. And discounters like AirTran (Atlanta) and Alaska Air (Seattle) could end up as part of future deals as well. Expect the skies to stay busy.
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The global economy is mysterious, even scary. Chief Business Correspondent Rick Newman connects the dots. In addition to his writing for U.S. News, Rick is the co-author of two books: Firefight: Inside the Battle to Save the Pentagon on 9/11, and Bury Us Upside Down: The Misty Pilots and the Secret Battle for the Ho Chi Minh Trail.
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