Continental-United merger to get hard look from regulators

Continental and United revived a deal that fell apart two years ago.
Continental and United revived a deal that fell apart two years ago. (Matthew Staver/bloomberg News)
Washington Post Staff Writer
Tuesday, May 4, 2010

NEW YORK -- A $3 billion merger agreement between Continental Airlines and United Airlines that would create the world's largest airline is expected to draw close scrutiny from regulators wary of the deal's potential impact on competition, particularly for international flights, analysts said.

The merger announced Monday would join United -- the dominant carrier at Dulles International Airport and a significant operator of transpacific routes -- with Continental's extensive network in the Northeast, Europe and Latin America. The combined company would serve more than 144 million passengers annually in 59 countries.

Analysts largely consider the all-stock deal a plus for the ailing and crowded domestic airline industry, where there is an overhang of capacity. The merger, they said, could enable the airlines to reduce the number of seats in the sky by eliminating overlaps and giving them the room they need to hike prices.

Continental chief executive Jeffery A. Smisek, who would become the head of the merged company, told analysts and reporters in a conference call Monday that the deal should "readily pass muster" with regulators.

"We know what the process is, we know what the law is, we know how the markets are defined. We have done a very rigorous analysis," he said. "There are no two carriers that you could put together in a more complementary way than United and Continental."

Still, some analysts said that a green light from regulators was not a sure thing. They said the combination could lead to reduced service and increased prices for travelers. The Justice Department, which confirmed Monday that it was reviewing the proposed merger, is expected to take a particularly hard look at competitive issues on some international flights, analysts said.

Last year, the Justice Department raised objection to a request for immunity from Continental, United and other airlines that wanted to jointly operate their international networks. That request was nonetheless granted by the Transportation Department.

"We have reason to think the DOJ would be concerned about this, because they actually complained about this," said C. Scott Hemphill, an antitrust law professor at Columbia University.

In order to win regulatory approval, Hemphill and others said the airlines might have to divest operations, such as some China-U.S flights. The two airlines are the only U.S. carriers that offer direct service to Beijing from within the continental United States.

Washington-area travelers could see reductions in service, especially if the combined airline decides to consolidate United's Dulles hub with Continental's hub in Newark, analysts said.

"Do they really need two Eastern Seaboard hubs?" said Rick Seaney, chief executive of the Web site FareCompare. "That will be the question everybody will be asking." Still, Seaney said he doubts Dulles service would be pared back significantly.

Smisek said the transaction would add -- not reduce -- competition in a market of global carriers. "Airfares are not something we set -- trust me, if we could, it would be different," he said. "This is not a cost-driven business. This is a demand-driven business."

Smisek and Glenn F. Tilton, the chief executive of United's parent company, UAL Corp., who is to become non-executive chairman of the merged airline, said they expected to achieve annual savings between $1 billion and $1.2 billion by 2013. They said that transition costs -- such as merging technology systems and severance for employees -- would run about $1.2 billion over three years. The combined airline would be called United Airlines, headquartered in Chicago.

Critical to the success of the merger is support from the airlines' workers. Opposition from unions have cast a costly shadow on previous deals.

Unlike the Delta-Northwest transaction this year, United and Continental did not reach labor agreements in advance of the merger. Executives said the merger talks -- lasting just three weeks -- had not allowed time to work out a labor deal beforehand but expressed enthusiasm that a resolution could be reached.

"While there is potential for this transaction to create a truly great airline, there are also risks involved," unions representing United and Continental pilots said in a statement. "We have sacrificed too much through years of concessions, furloughs, pension freezes and terminations to accept unwarranted risk, and any risk requires reward."

Staff writer Sholnn Freeman contributed to this report from Washington.

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