I don't think there are any immediate implications of the UA-CO merger for YVR given few routes and little competition between the two on routes here, but some very interesting things could potentially impact the airline industry. Look at some of the market shares the combined airline would have at major airports like Newark!
United-Continental Merger Is Confirmed
By JAD MOUAWAD and MICHAEL J. de la MERCED
Published: May 3, 2010
United Airlines and Continental Airlines on Monday announced a $3 billion merger that would create the world’s biggest airline.
The all-stock deal would form a coast-to-coast American behemoth with a leading presence in the top domestic markets, including New York, Chicago and Los Angeles, along with an extended network to Asia, Latin America and Europe. The deal was completed in a remarkably swift two weeks, and would give the airlines the muscle to fend off low-cost rivals at home and to take on foreign carriers abroad.
United is buying Continental, and the combined company will keep the United name and be based in Chicago. Jeffery A. Smisek, Continental’s chief executive, will run the company. Assuming the deal wins antitrust approval, the merged airline would replace Delta Air Lines as the top carrier.
The boards of both companies met Sunday to approve the all-stock deal. The UAL Corporation, United’s parent company, will issue 1.05 shares for each Continental share, valuing the acquisition at $3.17 billion, based on Friday’s closing price. The merger is expected to be completed before the end of the year.
For consumers, the merger could eventually result in higher prices. Though the new company does not intend to raise fares, according to people briefed on the matter, one of the rationales for airline mergers is to cut capacity. That reduces the number of seats in the industry and allows airlines to increase fares.
In addition, United and Continental will no longer be competing against each other on some routes, allowing them to save money but offering travelers fewer options.
“Airlines are struggling to find a business model that makes sense,” said Scott Sonenshein, an assistant professor at the Jones Graduate School of Business at Rice University. “Consolidation gives them more leverage. As a consumer, you will have less choices, fewer routes, higher prices and more fees.”
Still, in the last decade fares in the United States have declined because of pressure from low-fare airlines like Southwest Airlines and JetBlue Airways, as well as lower passenger demand. As a result, previous mergers have had a muted effect on ticket prices, especially on routes served by low-fare carriers.
Even with the steep cuts made in the last two years, airlines are still losing money, with too many seats chasing too few passengers. For much of the last decade they have suffered a succession of powerful blows — from the terrorist attacks of 9/11 to rapidly rising fuel costs and the recession. They have also been straining to keep up with low-fare competition.
But with the economy starting to improve and passenger traffic picking up, the industry is generally healthier now, with more cash and less debt. Credit markets have also thawed, allowing access to capital.
Combined, United and Continental have 21 percent of domestic capacity, in terms of so-called available seat miles, or one seat flown one mile. Delta has a market share of 20 percent. Globally, the merged companies would have a 7 percent market share.
The merger would put pressure on American Airlines, which was once the market leader, but which would drop to third place. While American’s executives say they do not feel threatened by industry mergers, Wall Street analysts have been displeased by the company’s performance.
US Airways, which three weeks ago began its own merger talks with United, is now left on the sidelines, raising questions about its ability to survive as a stand-alone carrier.
The United-Continental deal has some major hurdles to clear. The airlines need to win approval from the Justice Department’s antitrust division, a challenge given the renewed regulatory zeal in Washington. Unlike the Bush administration’s six-month review of the Delta-Northwest deal, analysts expect a lengthier and more complex review of this merger.
The merger also needs the backing of employee unions, whose opposition to mergers in the past has undone many of the proposed savings. One factor in favor of the deal is that United’s pilots’ union indicated last month it would not oppose a deal with Continental, whose own pilots have so far remained silent.
The board approvals end nearly a month of intrigue after United initiated talks to combine with US Airways. Those negotiations caught Continental executives by surprise, according to people with knowledge of the matter. Many analysts said United’s talks with US Airways were intended all along to lure Continental to the table.
United and Continental were close to a merger two years ago, but Continental walked away because of United’s poor financial health.
The earlier talks allowed for swift negotiations this time. United and Continental executives quickly settled some potentially divisive issues, like the name of the combined company, where its headquarters would be and who would run it. United’s chairman, Glenn F. Tilton, would remain for two years. After that, Mr. Smisek of Continental would become the executive chairman.
The Chicago connection could provide additional benefits. Mr. Tilton has been courting local politicians, and the city is eager to retain a major business. United now could use that leverage with the Obama administration, whose ties to Chicago run deep.
United shareholders would own 55 percent of the combined company, with Continental shareholders owning the rest. Management would be roughly split between the sides. The new entity would expect annual cost savings of $1 billion to $1.2 billion, and would still fly to 370 cities in 59 countries.
The combined airlines would have a 40 percent market share at San Francisco International and 35 percent at Chicago O’Hare International, according to data compiled by Cambridge Aviation Research, a consulting company. At Houston Intercontinental, one of the city’s two airports, they would have 64 percent of the market and at Newark Liberty International, 55 percent.
A merger could yield more than $2 billion in additional revenue and cost savings, according to estimates by Vicki Bryan, an analyst at Gimme Credit.
The deal is a personal success for Mr. Tilton, a former oil executive who ran the Texaco Corporation until it was acquired by Chevron. He took over United in 2002 as it was on the verge of bankruptcy, and has since pushed relentlessly for a merger.
It also vindicates the work of Kathryn A. Mikells, United’s chief financial officer since November 2008, who is the highest-ranking woman in an industry dominated by men. Analysts have praised her for United’s cost-cutting efforts in the last year, Jeff Straebler, a strategist at RBS Securities, said.
United’s improved finances have allowed for a major turnaround in its fortunes. In 2008, it was Continental that was close to buying United. But as that deal was being negotiated, United reported steeper-than-expected losses, leading to doubts about the company’s health even as soaring oil prices were crippling the entire industry. Just hours before a deal was to be announced, Continental executives walked away.
But in the last two years, United has improved its cash position, aggressively reduced capacity, raised new revenue from bag and other fees, and cut costs. It now has $4.5 billion in cash.
New York Times
http://www.nytimes.com/2010/05/04/business/04air.html?hp
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Hope JAL will still be around when I take my next trip.
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