Majestic Research

Time Magazine

The United-Continental Merger: Bad for Consumers?

By Deidre Van Dyk
Published: May 03, 2010

Wall Street signaled approval to the UAL and Continental deal, sending both stocks higher after the $30 billion merger was announced on Monday. Consumers, though, might be more tearful than cheerful, since super-cheap air travel might soon be a fading memory.

The price wars of the past few years have produced airfares that seemed at times too good to be true. “There was this surge of irrational pricing,” says George Hobica, founder of AirfareWatchdog.com. “It was great — you could fly New York to San Francisco for $99.” Watching carriers jump into each other’s hubs and lower fares led Hobica to found his popular fare search company. (See the best business deals of 2009.)

But now, says Hobica, pointing to the recent Delta-Northwest merger plus today’s announcement, “We’re moving into an era where we’re carving out empires.”

Sounds ominous, but “for the airlines it’s a good thing,” says Matthew Jacob, airline analyst at Majestic Research, referring to the likelihood that all airlines should gain some pricing leverage because the combined UAL and Continental carriers will almost certainly cut capacity in the skies. “By not having as much supply, they can fly fuller planes, charge higher prices and operate more efficiently,” he says. “For the customer, well, I don’t think you’re going to see planes that are only two-thirds full and bargain basement prices from airlines desperate to fill seats.” (See the worst business deals of 2009.)

The joint press release, bearing the United name re-cast in Continental’s font — an innovation soon to be on the combined fleet of aircraft if the merger is approved — promised continued “strong competitive pressure on fares” from the industry. That allusion was to budget carriers like Southwest, JetBlue and AirTran, which make a fare difference almost everywhere they fly. For flights from New York to Atlanta, for example, there are last-minute fares on both a legacy airline, Delta, and a budget, AirTran, for $269. But the same flight from Newark, N.J., to Atlanta, a route without one of the budget carriers, costs $961 on either Delta or Continental.

Whether United and Continental will get much more efficient after the merger is unclear to Ed Perkins, contributing editor of SmarterTravel. “They’re already so big I don’t see this making a major difference in their cost structures,” he says. The three biggest costs to the airlines — planes, fuel and labor — are probably well negotiated at the size they are. “What this really is about, though they won’t say it,” Perkins says, “is they want to raise fares.” And with the new Continental-United holding 21% of the domestic routes, and the new Delta 20%, it means almost half of routes will be in the hands of two companies. (See a photo gallery of the former leader of Southwest Airlines, Herb Kelleher.)

Perkins, who bluntly declares that this merger will be bad for consumers, ventures a 10% fare rise on some less contested routes. What he’s even more concerned about is the likely depreciation of frequent flyer points. While you won’t lose any miles, and the differing rules in each airlines plan will be sorted out, “what matters is, can you get seats? They’ll probably cut back on the seats allocated for frequent flyer miles,” says Perkins.

The merger of cultures is another thing to watch. United, always known for innovation — they were the first airline back in the 1930s to put kitchens on its planes for meal service, and the first airline in 1984 to have routes in all 50 states — has a program popular with flyers called economy plus which provides seats with more legroom. You can buy membership in a program that allows you to upgrade, or when space is available upgrades are offered at the gate for $20. Will the popular program go fleet-wide, or will it be phased out?

The biggest concern by far, however, is costs. The prices on Delta-Northwest routes, Hobica says, are up at least 10% since the merger. But travelers are not defenseless, he points out. “The vast majority of leisure travel is discretionary,” he says. “When airlines raise fares, people stop flying. So [the airlines] have to be judicious.” Let’s hope he’s right.