Analysis: United-Continental deal will mean vital cost savings

The merger between US giants United Airlines and Continental Airlines will be touted as benefiting passengers in all the familiar ways – enhanced schedules, combined frequent-flyer schemes and so on.

But the real beneficiaries of creating the world’s biggest airline will be the owners of United and Continental, which lost a combined $933 million last year.

Assuming US regulators give the green light, the merger should allow major cost savings across the combined network – particularly in the US, where the combined airline is expected to cut 10% of capacity.

That will save cash and may push up average fares. At the same time, United and Continental calculate their combined international networks will win a greater share of corporate business.

The new United Continental is expected to emerge by the end of the year. US regulators are unlikely to stop it, having previously given the green light to the Delta-Northwest merger.

The deal appears to have few immediate consequences for UK companies or consumers. The combined airline is unlikely to surrender slots at Heathrow or cut transatlantic services, and what happens to fares from the UK depends more on the exchange rate, the oil price, pricing by rival carriers and taxation.

Virgin Atlantic, which stands outside the major airline alliances, has a code-share arrangement with Continental that, no doubt, it will seek to extend across the new carrier.

The aviation industry in general is bound to welcome the tie-up because of the cut in capacity. The pressure for consolidation is clear from IATA figures that suggest combined airline losses this year will total $4.5 billion – one-third of that due to the volcanic ash cloud that forced European airspace to close – following losses of $9.4 billion in 2009 and $15.9 billion in 2008.

US domestic traffic has been in steady decline since 2007, having previously provided the customer bedrock of US airlines for decades – and this in a market so badly wounded by 9/11 that most major US carriers had to pass through bankruptcy protection.

However, the deal leaves some of United Continental’s rivals with reduced choices for consolidation of their own. The smallest of the US legacy carriers, US Airways, appears out on a limb following yet another brief flirtation with United itself last month.

The pair have repeatedly been in merger talks. US Airways may yet merge with the new airline or more likely join American Airlines. It almost certainly will have to do one or the other.

American Airlines will fall from second to third-biggest US carrier after dominating the world’s largest aviation market for years until the merger of Delta and Northwest completed this January.

American may swallow US Airways, but most of its eggs are in a long-standing basket with British Airways, and now Iberia, which is awaiting anti-trust immunity. This would allow BA and American to coordinate fares and services, although they could not formally merge.

For its part, United Continental is likely to be happy with its Star Alliance partnership with Lufthansa – Europe’s biggest carrier by revenue which itself has swallowed Swiss, BMI, Brussels Airlines and Austrian Airlines over recent years.

We are a step closer to aviation’s biggest markets being dominated by Lufthansa-United Continental, Air France-KLM-Delta, and American-BA.

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