United/Continental Merger Hits Snag at Senate

While making it clear that the Senate committee is prepared to view the merger with an open mind, committee chairman Senator Herb Kohl (D-Wisc) noted that it will inevitably result in a reduction of competition and what needed to be established before it gets the green light is when the “tipping point” of competition is reached. Already there have been rumblings of discontent from many quarters that the merger may result in an increase in fares, particularly in areas where the new airline will be the only choice for travelers. Senator John Cornyn (R-Tex) echoed the sentiments of many when he pointed out, as an example, that the newly formed airline will be the only option available for passengers from Houston Intercontinental Airport to fly nonstop to Los Angeles and San Francisco.

A report by the US Government Accountability Office (GAO) details the overlap of the two airlines, noting that at this point it is unclear as to whether the merged airline would retain all its domestic hubs. The example quoted is that of the markets served by Continental out of Cleveland, and United out of Chicago, where both airlines currently serve 52 out of 62 domestic airports. If these markets can be adequately served by only one airline, which of the current hubs would be closed – United or Continental? When Continental CEO Jeff Smisek was questioned about the fate of the Cleveland hub, he somewhat evasively replied that decisions regarding the future air service will be based on demand.

Consumer Union consultant Bill McGee noted, however, that no matter what is initially promised or envisioned, previous mergers between airlines have resulted in service cuts, hub closures and a reduction in flights. Many agree that there is no reason to believe that the proposed United-Continental merger will be any different. Investors are no doubt keen to see what the outcome of the Senate hearings will be.