May 5, 2010
US carriers United Airlines and Continental Airlines have announced merger plans which will form the world’s largest airline company.
The deal should pave the way for some capacity and cost reductions that might help the embattled global industry rebuild profitability after years of losses. But don’t hold your breath.
There’s an obvious analogy between this latest tie-up and the merger agreement finally signed by British Airways and Iberia last month. Like the European carriers, the two US airlines offer complementary rather than competing routes. This makes it more likely the Department of Justice will approve the latest deal, but limits the scope for price-boosting capacity cuts. Stephen Furlong at Davy Stockbrokers nonetheless estimates the potential for capacity reduction at 10 per cent. And cost savings in central management – estimated at $1.1bn (£726m) – might raise margins a few notches.
It would be tempting to see this latest wave of consolidation as the precursor to an industry-transforming trans-continental deal. But this is unrealistic. The US still limits foreign ownership of its airlines at 25 per cent, and refused to compromise on this point at the latest round of ‘open skies’ negotiations in March.
“That’s not going to change,” says Paul Butler, airlines analyst at Macquarie. “There are just too many concerns about national security and job security.”
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Strategic alliances are a good second best to fully-fledged mergers, however, and these are on the rise. Washington issued preliminary approval – so-called anti-trust immunity or ATI – in March for American Airlines and BA-Iberia to collude legally over schedules and capacity. Delta, which became the industry leader upon its merger with Northwest Airlines two years ago, already enjoys ATI through its alliance with Air France KLM., another product of airline consolidation.
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