UA/CO: The Last Of America's Airline Mega-Mergers
Open Jaw

by Robert Kokonis

Yesterday’s announcement of the union of United and Continental will likely be the last of the American airline mega-mergers. The ramifications of the deal creating the world’s largest airline will include higher fares, a greater ability for U.S. carriers to compete against international carriers and alliances, and a better chance for stability in an ailing sector.

Here in Canada we could benefit from more codeshare choices to U.S. destinations, but the retail travel business could face the unpleasant prospect of U.S. carriers being in a stronger position to dictate distribution channel cost cuts.

No More Dance Partners

After United and Continental come together, there will be few airlines left of note for merger consideration. US Airways will be a distant fourth in size relative to the new United. Delta Air Lines, now fully merged with Northwest, will be second-largest and American Airlines third.

American will likely remain outside any merger activity, because there aren’t many scenarios that make sense. AA could acquire a much smaller airline such as Alaska Airlines, but, while strengthening AA on the U.S. west coast, such a deal would do nothing for it from a global strategic perspective.

US Airways does not represent a suitable AA merger partner because, while there would not be significant overlap in their respective major U.S. hubs, American and US Airways would have a mismatched fleet type, corporate culture and global alliance memberships. American will likely continue to focus its growth strategy on getting anti-trust immunity approval for its Oneworld hook-up with British Airways and Iberia.

Any consolidation which does take place in the U.S. will most likely be within the Low Cost Carrier or independent regional carrier sectors.

Canadian Impact

In terms of Canadian impact, the United/Continental merger strengthens the position of Star Alliance in North America, with likely improvements in the number of codeshare destinations available for sale to the U.S. As well, the trend towards alliance “joint ventures” whereby for example Star Alliance offers one corporate contract, will be made simpler by the involvement of one less carrier.

Another merger impact: fares will undoubtedly begin to rise, especially in key markets and from hubs dominated by the merged carriers. While this will hit corporate travel spend and the affordability of travel for the leisure market, the fact of the matter is that average fares in most U.S. markets have hardly budged over the past 15 years.

Strengthening The Model

As I have said consistently in the media, if you want a $39 fare to Vegas, don’t expect that carrier to stick around for the long term. Clearly, there is a fine line between competitive fares and sustainable fares. We have seen a global airline sector, and in particular the U.S. airline sector, have enormous difficulty dealing with soaring fuel prices and the recent economic recession. Now that fuel prices are again on the march upwards after a brief lull, consolidation is required to fix what is essentially an ailing industry. Consolidation will not be the tonic that fixes everything, but it will be a step in the right direction.

In an era of growing global competition across the airline, tour operator and travel management sectors, the combination of Continental and United, along with the recently completed Delta – Northwest merger, will enable U.S. carriers to compete more effectively against other large international air carriers and alliances.

Regarding travel agencies, I expect that once the merger is approved by U.S regulatory authorities – and I’m quite sure it will be, there may be increased efforts by U.S. airlines to take further costs out of their sales and product distribution channels as an offset to rising fuel costs. Such cost reductions could range from reduced override or loyalty bonuses, to greater restrictions on eligibility for private fares and corporate discounts.

The airline sector is coming off its worst revenue decline in 50 years. While loads and traffic have shown signs of improvement since last December, in the massive U.S. airline market there are still too many seats chasing too few passengers. Fewer carriers will help to strengthen the remaining players and improve chances of stability.

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