United and Continental Airlines are counting on more business travellers — not higher fares for vacationers — to make their US$3-billion merger pay.
United CEO Glenn Tilton and Continental CEO Jeffery Smisek announced Monday that the third- and fourth-largest U.S. airlines will consolidate into the world’s biggest, surpassing Delta Air Lines in size.
They hopes to draw more business travellers who will pay top dollar for last-minute tickets. It’s a stock swap deal in which United acquires Continental, and the new airline is to be called United.
The two airlines have been losing tons of money, first from high fuel prices, then the recession. Now they say their combined network of flights across the U.S. and around the world will attract enough corporate travellers to boost revenue by up to $900 million a year.
“The only people happier than Jeff and I today is our corporate sales team,” Tilton said.
Henry Harteveldt, a travel-industry analyst for Forrester Research, said U.S. leisure fares probably won’t change much because Continental and United routes overlap heavily with low-fare carriers such as Southwest. They compete with discount carriers on 92 per cent of the 50 biggest routes they serve, Harteveldt said.
“The leisure market is always hotly contested,” so it’s less likely to tolerate fare increases, he said. “Business travellers are less price-sensitive. They have to get on that plane, so they’ll pay more for those flights.”
Antitrust regulators will scrutinize the deal for its effect on fares, but Smisek and Tilton said even the larger United won’t have be able to boost prices, because other carriers might undercut them.
“There is no carrier in the world that can set air fares,” Smisek said. “We couldn’t set air fares before this. We can’t set air fares after this.”
The deal would create a giant airline with major hubs in key domestic markets including New York, Los Angeles, Chicago, Houston and San Francisco and an international network that includes United’s extensive routes in the Pacific and Continental’s routes to Europe and Latin America.
The companies said 57 per cent of their capacity would be domestic, with 20 per cent across the Atlantic, 15 per cent across the Pacific and eight per cent to Latin America.
Smisek said the carrier would not eliminate service to any cities, and said Cleveland would continue to be one of the hubs when deal closes, even though it is near United’s hub in Chicago.
“But it would be premature to talk about Cleveland or any hub for that matter in terms of how things will shake out over the next few years,” he said.
Officials for the two airlines said they will eliminate some headquarters jobs in Houston and Chicago, but they gave no numbers.
The deal will leave three big U.S. airlines with major international routes — the new United, Delta and American Airlines, with US Airways a distant fourth.
United is the third-largest U.S. carrier by traffic, while Continental Airlines Inc., in Houston, is No. 4.
The carriers said they would file their applications quickly with regulators including the U.S. Justice Department and the European Commission. Justice Department spokeswoman Gina Talamona said its antitrust division “is looking at the proposed transaction between these two airlines.”
The department routinely examines airline deals, which may affect services and prices for consumers.
Smisek said United and Continental would seek shareholder votes in September, with the hope of closing the deal by the end of the year.
The companies insisted the deal is a merger of equals. Smisek will run the combined operation as CEO, and the companies plan to pull executives from each company in “roughly equal numbers.”
But United shareholders will hold a majority stake, and the airline will be based in United’s headquarters in Chicago.
United’s Tilton will be non-executive chairman for up to two years before Smisek adds the chairman title.
The new parent company will be called United Continental Holdings Inc., and have about $29 billion in annual revenue, based on 2009 results, and $7.4 billion in unrestricted cash. The airlines said combining would save them $1 billion to $1.2 billion a year by 2013, including between $800 million and $900 million in new yearly revenue.
They also said they expect costs of about $1.2 billion for expenses such as severance for laid-off workers and expenses from new labour deals.
The deal came together in just three weeks after reports surfaced that United was in discussions with US Airways.