United-Continental merger faces regulatory hurdles
Before the merger of United and Continental airlines can take wing, executives first must convince antitrust regulators that their new behemoth won’t harm consumers by raising prices or squelching competition.
The carriers’ first public showdown with critics is likely to come at a June 16 hearing of the aviation subcommittee of the House Transportation Committee. Meanwhile, state and federal officials also are preparing to take a close look at the proposed deal to create the world’s largest airline and the ripples it would send through the travel industry.
Rep. James L. Oberstar (D-Minn.), the committee’s chairman and a longtime airline critic, has asked Justice Department officials to block the proposed tie-up. He claimed in a May 5 letter that the deal would pressure other large U.S. carriers to merge, ultimately leaving consumers with less service and higher fares.
Executives for United and Continental portray the transaction as one that will foster growth. They expect their $3-billion deal to gain approval from Justice and Transportation department officials over the next seven months, allowing them to close the transaction by year’s end.
“We know what the process is, we know what the law is, we know how the markets are defined,” Continental Chief Executive Jeff Smisek told analysts and reporters as he unveiled the merger May 3. “There are no two carriers that you could put together in a more complementary way than United and Continental airlines.”
Legal experts are less confident of a speedy review for a deal that could test the Chicago loyalties of President Obama and Transportation Secretary Ray LaHood. The new carrier, to be called United, would be based in United’s hometown of Chicago.
The Obama administration has vowed to be more critical than President George W. Bush’s administration in examining megamergers that leave markets controlled by a handful of giant players.
U.S. Atty. Gen. Eric Holder told Congress last week that Justice Department officials would conduct a fair and thorough review of the proposed deal.
“I can assure you that political considerations will not be a part of that process,” Holder said, according to a report by Reuters.
Ohio Atty. Gen. Richard Cordray also is leading 15 states in an investigation of the merger’s effects on consumers.
Illinois is not participating in the probe. “But as with any major transaction, we will monitor the progress of this review and get involved if necessary,” said Robin Ziegler, press secretary for Illinois Atty. Gen. Lisa Madigan.
Antitrust regulators are expected to focus on how United and Continental’s networks overlap, paying attention to routes where the merged entity could squash competitors. Analysts say the deal is likely to draw more scrutiny than the last big airline merger: Delta’s 2008 takeover of Northwest.
United and Continental have little redundancy at their eight major hubs, which stretch from Los Angeles to Newark, N.J. But they would overlap on at least 13 nonstop routes, 11 of which would be reduced to monopoly or duopoly status, said analyst Jamie Baker of investment bank JPMorgan Chase & Co. By comparison, Delta-Northwest overlapped on a dozen nonstop routes, seven of which emerged as “highly concentrated,” Baker said.
Delta and Northwest successfully argued that low-cost competitors such as Southwest Airlines and JetBlue Airways would ensure that airfares remained competitive in cities where they dominated.
“That argument succeeded with the last administration,” said Mark Popofsky, co-head of the antitrust practice at law firm Ropes & Gray. “The government is probably going to take a harder look this time around.”
Justice Department officials were skeptical of a 2009 joint venture that involved United and Continental and unsuccessfully fought a Transportation Department decision to grant the carriers and two Star Alliance partners antitrust immunity to set prices and share revenue on flights across the North Atlantic.
They could prolong the regulatory review of the United-Continental merger by also examining its potential effects on one-stop flights and the degree to which Continental, as the No. 4 airline, competitively battled United, the third-largest carrier, Popofsky said.
If they find routes where competition could be harmed, antitrust regulators typically attempt to stoke competition by requiring the merger partners to surrender airport gates or landing slots to other airlines, observers said.
But the involvement of so many states in the merger probe could make it difficult for antitrust regulators to coordinate investigations or to reach consensus on the appropriate remedies within the seven-month time frame the airlines seek, said Popofsky, a former Justice Department antitrust official.
“There’s a herding-cats aspect to having the states involved,” he said.
