Airline dominos?

Continental, United offer signals after Delta-Northwest merger plan

April 16, 2008|By Peter Pae | Peter Pae,LOS ANGELES TIMES

Continental Airlines Inc. and UAL Corp.'s United Airlines gave strong signals yesterday that they would consider a merger, either together or with someone else, raising the prospects for another big airline deal.

A combination of the two carriers would create an even larger airline behemoth than Monday's proposed merger of Delta Air Lines and Northwest Airlines and could drastically alter the competitive landscape.

In the end, the industry shakeout could mean substantially higher air fares leading to more people staying home, some aviation experts believe.

With industry consolidation and the recent demise of three discount carriers, "You have a perfect storm of badness for the consumer," said Roland T. Rust, chairman of the marketing department at the Robert H. Smith School of Business at the University of Maryland. "It's just a real bad situation, and it's likely to get dramatically worse."

The possibility of a second major airline deal came as Congress raised concerns that higher fares and fewer flights might be the result of a merger of Delta and Northwest. The deal would create the world's largest airline, surpassing American Airlines.

"In our experience, the inescapable lesson of three decades of deregulation is that mergers and the resulting reductions in competition often lead to higher fares, deterioration in service and financially weakened surviving airlines," said Rep. Jerry F. Costello, an Illinois Democrat who chairs the House aviation subcommittee.

Minnesota Rep. James L. Oberstar, the Democratic chairman of the House Transportation Committee and a key critic of airline consolidation, said he and other critics would rally lawmakers worried about losing airline service in their states to ensure that the deal undergoes a thorough scrubbing.

"We will marshal all the forces we can - within the Congress and from the communities served by the existing carriers," he said.

While some lawmakers might scrutinize the merger, financial analysts said, Congress can do little to block the deal. They predicted the combination will win approval from the Bush administration by year's-end. The merger needs approval of the Justice Department, which could block the deal if it finds that the combination is anti-competitive.

"It's not likely to be a problem," said Mark S. Ostrau, co-chairman of the antitrust and unfair-competition group for Fenwick & West, a Silicon Valley, Calif., law firm. He said the Justice Department might find a few small airports where the new airline might dominate, but, "They are not likely to be enough to raise competitive concerns."

Analysts said Delta, with its main airport hub in Atlanta, and Northwest, with major presence in Minneapolis, have few overlapping domestic routes. Internationally, Delta has extensive service to Europe and Latin America while Northwest has focused on Asia.

As Congress, labor unions and consumer groups weighed the impact of the Delta-Northwest pact on passengers and workers, Wall Street swelled with speculation about who would be next.

With merger talk in the air, Continental issued an internal memorandum to its employees saying it would review "strategic alternatives" to "make sure we remain a strong long-term competitor."

The Delta-Northwest merger "will change the competitive landscape for Continental and the entire airline industry," said the memo, which was written by Lawrence W. Kellner, chief executive, and Jeffery A. Smisek, president. "As we've said repeatedly for more than a year and a half, our preference has been to remain independent as long as the competitive landscape remained the same. However, the landscape is changing."

For its part, United's chief executive, Glenn F. Tilton, said in his employee memo that the airline would "participate in a consolidation when and if it is the right choice."

"The industry has changed - both globally and domestically - and the old paradigms no longer apply; the current fuel and economic environment are only accelerating the need for a different approach," he said.

A combination of United, the nation's second-largest airline, with No. 4 Continental would create the world's largest airline - ahead of the proposed merger of No. 3 Delta and No. 5 Northwest.

American Airlines, the largest carrier, would fall to third in terms of passenger traffic and could be left without a marriage partner because it would be one airline that could raise substantial anti-competitive concerns if it were to hook up with any of the other five major carriers.

Some analysts said American might look for a large regional airline such as Alaska Airlines as a possible partner or try to play the spoiler by making a bid for Delta or Northwest.

Peter Pae writes for the Los Angeles Times. Times reporter Richard Simon contributed to this article.

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