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The United-Continental Merger: Will it Work?May 24, 2010 By: George Dooley
Travel agents and GDS companies could be adversely impacted by airline consolidation such as the proposed merger of Continental (CO) and United (UA), the Business Travel Coalition (BTC) warns on the eve of U.S. Senate and House of Representatives hearings on the proposed link up.
Urging caution, the BTC says it has viewed airline mergers and industry consolidation with a good measure of skepticism, noting shortfalls in benefits for all stakeholders and saying antitrust analysis should go beyond management spin.
BTC’s key concern is that a merger would likely cause an American Airlines combination with US Airways, and thus create three powerful mega carriers. “Even non-CO or UA executives publicly exclaim, as non-merger participants, the benefits to their airlines from the capacity removed, and attendant pricing power achieved, by this proposed merger,” the BTC said. “With three mega-network carriers and their alliance partners acting as a single buyer there is the risk of these groupings exercising monopoly power, i.e. driving pricing for all manner of services below competitive levels. At risk are travel agents, global distribution systems, airports, food service providers, labor, equipment manufacturers and many other services providers. As a consequence, it could be easier by an order of magnitude for these behemoths to shift distribution and other costs to the consumer.
“The rationale to support a CO-UA merger would include that. in the two years since the Delta-Northwest merger, low cost carriers have continued their growth; network airlines' balance sheets have continued to deteriorate; jet-fuel prices are on the upswing again; business travel volume and yields still have not recovered; and low cost new entry is poised to increase as parked aircraft and crews are available and capital markets are loosening,” the BTC continued. “Under current airline alliance antitrust immunity provisions, an alliance can refuse to deal with a corporate buyer unless that buyer agrees to deal only with the alliance, versus individual members. Radical consolidation would likely further strengthen these alliances in dealings with corporate customers driving down the value of their contracts.”
The BTC says the valuation of the proposed Continental-United merger would need to assume the collapse of network carriers to three. “Remedies would need to be considered that reflect the unique competitive structure of the industry wherein in mega carriers would be able to more easily wield their power against consumers as well as supply chain participants,” the BTC said.