2 more carriers consider merging
Continental Airlines Inc. and UAL Corp.’s United Airlines gave strong signals Tuesday that they would consider a merger, either together or with other carriers, raising the prospect of another big airline deal.
A combination of the two would create an even larger airline behemoth than Monday’s proposed joining of Delta Air Lines Inc. and Northwest Airlines Corp., and could drastically alter the industry’s competitive landscape.
A United-Continental deal would have a significant effect on Southern California travelers because the combined airline would become the largest carrier at Los Angeles International Airport, accounting for 18% of the passenger traffic there, surpassing American Airlines, which has 15% of the market share.
In the end, the industry shakeout could mean substantially higher fares, resulting in fewer people traveling by air, 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 University of Maryland’s business school. “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 concerns were being raised in Congress that a Delta-Northwest combination would lead to higher fares and fewer flights. The proposed marriage of Delta and Northwest would create the world’s largest airline, surpassing American.
“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 (D-Ill.), chairman of the House aviation subcommittee.
Rep. James Oberstar (D-Minn.), 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.
Although some lawmakers may intensely scrutinize the deal, financial analysts said, Congress can do little to block it. They predicted that the combination would win approval from the Bush administration by the end of the year. The marriage needs the approval of the Justice Department, which could block the deal if it found that the combination was 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 Mountain View, Calif., law firm. He said the Justice Department might find a few smaller 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 a major presence in Minneapolis, have few overlapping domestic routes. Internationally, Delta offers extensive service to Europe and Latin America, whereas Northwest has focused on Asia.
As Congress, labor unions and consumer groups weighed the effect of the Delta-Northwest pact on passengers and workers, speculation abounded on Wall Street over which airlines would be next.
With merger talk in the air, Houston-based Continental issued an internal memo to 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 from Chief Executive Larry Kellner and President Jeff Smisek.
“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.”
UAL Chief Executive Glenn Tilton said in a memo to United’s employees 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,” Tilton said.
A combination of United, the nation’s second-largest carrier, with No. 4 Continental would create the world’s largest airline -- ahead of the proposed marriage of No. 3 Delta and No. 5 Northwest.
Combined, United and Continental would have a fleet of nearly 930 planes flying to more than 470 destinations.
The proposed Delta-Northwest airline would have a fleet of 800 planes serving 380 destinations.
American, the largest carrier currently, 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 another major carrier.
Some analysts said American might look for a large regional carrier such as Alaska Airlines as a possible partner, or try to play the spoiler by making a bid for Delta or Northwest.
Shares of Chicago-based UAL fell $1.29 on Tuesday to $22.32, Continental dropped $1.53 to $20.36, Delta sank $1.53 to $9.16 and Northwest was off 94 cents at $10.28.
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Times staff writer Richard Simon in Washington contributed to this report.
