United-Continental Merger: Watch Out for Higher Fares and Fewer Flights

The airline merger between UAL's (UAUA) United and Continental (CAL) raises many serious questions, not the least of which is how air passengers will be affected.

The answer to that one seems simple: For the average consumer, the merger will likely mean higher fares and fewer flights as the new company cuts unprofitable routes and raises prices after taking out competition (frequent-fliers, however, aren't likely to suffer). George Hobica, president of Airfarewatchdog.com, a fare comparison site, told the Houston Chronicle, "Fares could double for nonstop flights from Houston to Chicago, Washington, D.C., and other cities where United and Continental hubs have overlapping nonstop flights."

Rising fares wouldn't be limited to these routes alone. The Chronicle also quoted Darryl Jenkins, an aviation expert, who noted that "fares could rise 10% to 15% across the industry within the next year."

Even though Continental CEO Jeff Smisek said on Monday that "No airfare increase is built into the synergies" of the combined airline, the economics facing the new entity are brutal. After all, the airline industry is hugely unprofitable. It lost $9.4 billion in 2009 and is forecast to lose another $2.8 billion in 2010.

The airlines' two biggest costs are labor and jet fuel. With the exception of clever -- but unreliable -- hedging strategies on fuel, airlines can't do much to control fuel costs. The only options they have to limit their losses are to cut service and raise airfares.

Cleveland Could Get Quieter

Those service reductions could be fairly dramatic. For example, Continental now runs 54 weekly flights from Houston to Chicago, while United flies 35. At least some of these flights will be cut back, according to the Chronicle.

But the biggest cutback is likely to take place in Continental's Cleveland hub. Ed Perkins, contributing editor at SmarterTravel.com, told the Chronicle that Cleveland "is the most vulnerable because it is between United's hub in Chicago and Continental's in Newark."

To be fair, the merger won't hurt consumers who have frequent-flier miles with the two airlines. According to The Middle Seat Terminal, "Frequent-flier programs already have reciprocal rights. If you are a member of Continental's airport club program, you can use United clubs domestically. According Randy Petersen, founder of FlyerTalk.com and publisher of Inside Flyer magazine, 'So much work has already been done that this would be likely one of the most 'snooze-worthy' frequent-flier mergers ever.'"

Block the Deal

With oil prices rising in the wake of the gulf oil spill, more mergers are likely. And this means a further decline in value for passengers. Should the Justice Department's Antitrust Division stop this merger before this trend goes further? The answer is yes. The anticompetitive outcomes ought to be enough to keep the Antitrust Division from approving this deal.

If the merger is approved, the combined company will have 21% of domestic flying capacity, taking the lead from Delta (DAL), which will lose what had been its leading 20% share of the domestic market.

The U.S. needs a viable airline industry if it hopes to keep its economy going. But what's in the interests of the industry and most airline shareholders -- higher prices, lower costs and worse service -- also hurts airline employees and customers. For the sake of both groups, I hope the Antitrust Division blocks this deal.