Continental, United merger becomes done deal

October 1, 2010 2:50:44 PM PDT
United and Continental closed the deal on Friday that will create the world's biggest airline, although it will be months before it looks that way to travelers.

By early 2012, travelers will see a combined airline called United Airlines, with Continental's blue and gold colors and globe logo on the tail.

Between now and then, the new company, United Continental Holdings Inc., will run the two as separate operations, with each airline's customers checking in at Continental or United websites and airport counters. Their frequent flier programs will stay separate for now too.

The company said travelers should begin to see a more unified brand in the spring.

Will they see higher fares too?

Rick Seaney, CEO of FareCompare.com, said the economy will hold down prices in the short run. Eventually, he expects reduced competition to lead to higher fares -- the result of Delta's takeover of Northwest, Continental's disappearance, and Southwest's pending purchase of AirTran.

"If you take two carriers out, and a third pretty soon, prices are likely to go up," he said.

Airline pricing is notoriously fickle. Fares can rise on one route while falling on another due to competition, the economy and fuel prices.

Then there are the different types of tickets. Bob Harrell, an aviation and travel consultant in New York, said business fares -- high-priced, last-minute tickets -- will rise now as the overall economy improves. Airlines will have less success raising leisure fares, he said, because consumers worried about jobs and home values will wait for sales.

Mergers don't automatically lead to higher fares. Airlines are collecting less in fares per mile on domestic flights than they were before Delta Air Lines Inc. bought Northwest in 2008, thanks to the recession and competition from low-fare carriers. They have offset weak fares by raising billions from add-on fees for checking baggage and changing flights.

The U.S. had at least five major international airlines before Delta bought Northwest. Now it has three dominant international airlines -- United Continental, Delta, and AMR Corp.'s American -- and a big domestic hauler, Southwest Airlines Co.

United and Continental together carried 8.7 percent more traffic than Delta through August of this year. The combined airline would have about 5,800 daily departures, versus Delta's 5,715.

United Continental hopes its larger route map will attract more corporate travelers.

"We believe we'll be able to increase the mix of business travelers because we can go to corporations and offer them a very compelling proposition of flying on a single carrier," United Continental CEO Jeffery A. Smisek said on a conference call Friday. Business travelers in a hurry favor nonstops over changing planes or taking two separate airlines.

Smisek spoke from United's headquarters in Chicago, where the new company is based. The airline will be closing Continental's headquarters and operations center in Houston, but Smisek declined to discuss job cuts.

The company expects up to $1.2 billion in combined new revenue and cost savings by 2013, much of it in new sales as a larger network attracts new passengers.

J.P. Morgan analyst Jamie Baker wrote in a note that he is "doubtful" of the company's projections. He wrote that Delta management claimed $1.5 billion in similar gains from the Northwest deal, but its margins have only been on par with the rest of the industry.

Baker expects $400 million in extra labor costs at United Continental as it integrates two unionized work forces.

Smisek said it will take at least a year to get a single operating certificate from the Federal Aviation Administration. He wants joint union contracts with all of the airline's workers by then.

That could be tough. United and Continental pilots are in the same union but have very different limits on the size of planes flown by regional partners. Flight attendants and ground workers are in different unions.

Shares under the new ticker "UAL" rose $1.11, or 4.6 percent, to $24.75 in afternoon trading. The old UAL Corp. and Continental Airlines Inc. shares had their last day on Thursday.


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