Analyst: Clear path for United-Continental merger
The proposed merger between United Airlines and Continental makes economic sense and should sail through the regulatory approval process, Helane Becker, managing director of transportation research at Jesup & Lamont Securities, said Monday.
Becker, speaking at the Cargo Network Services conference in Miami, said the tie-up between the two U.S. carriers is a reaction to the successful merger between Delta and Northwest in 2008. Delta, she said, has become a threat to Continental in the New York region as it gains market share through growth at John F. Kennedy International Airport.
Continental operates a hub at Newark, N.J., which connects to its extensive network in the eastern half of the United States, Latin America, Europe, and beyond. United’s network is strong in the western half of the United States and in Asia.
“So from an end-to-end stand point the merger makes a lot of sense,” the aviation and air freight analyst said.
Talk of a possible United-Continental combination has been one of the worst kept secrets the past two years. The two airlines first began merger talks two years ago when oil prices skyrocketed past $145 per barrel. After oil prices subsided, another motivation for linking up was the financial crisis as executives worried that access to capital markets would dry up and they needed ways to preserve cash to finance liabilities, such as Continental’s order book for new aircraft.
Becker predicted the U.S departments of Transportation and Justice, as well as the European Union, will approve the deal within six months because there is no overlap in their international route structures and only a small handful of domestic routes that overlap. United and Continental are both members of the Star Alliance, which means regulators have already closely reviewed their business plans and impact on the market.
Other airline analysts say the new United Airlines, which would displace Delta as the world’s largest, will inevitably pare some redundant routes or reduce flights to smaller cities, resulting in higher fares for consumers. Many airlines view consolidation as the best hope to stem huge losses and become more competitive with so-called discount carriers.
The next step in the process is a vote by shareholders in September.
The airlines should close on the merger by December and will then spend 2011 optimizing their networks and integrating information technology and other systems while they continue to operate as separate companies. Becker predicted they would obtain a single operating certificate from the DOT by January 2012 and realize 75 percent of the merger’s benefits in the first year.
The merger is aided by the fact that both airlines have open labor contracts, which makes it easier to get unionized employees on the same plan. The combined airline would have more than 700 aircraft and one of the industry’s youngest fleets, with an average age of 11.5 years. The combined airline will be better positioned to optimize its aircraft mix for the right missions, she said.
The deal also could provide a boon to all-cargo carriers as new United reduces capacity to become more efficient, reducing available space for freight on certain international legs, Becker said.
But air freight industry executives at the conference dismissed the notion. Freight forwarders, which are the primary customers of passenger airline cargo divisions, will not be willing in most cases to pay up to 60 percent more for space on a freighter and will simply switch to another passenger airline unless there is no available service to a particular destination. Shippers that use passenger airlines typically have smaller shipments and don’t require the main-deck capacity of an all-cargo carrier. And, if United pulls out of a market or downsizes its aircraft, other airlines may step in to fill the market vacuum, they said. ' Eric Kulisch