United, Continental Team Up
The two airlines will work together as they struggle through high oil prices.
June 19, 2008— -- The airline industry did a little more reshuffling today, with Continental and United announcing plans to link their networks through a new alliance.
It's not quite a merger, but some see this as the first step toward the two airlines joining forces.
As oil prices have skyrocketed in the past few months, most major U.S. airlines have struggled to remain profitable. Fuel costs for the airline industry are expected to jump $20 billion, about 50 percent, to $61 billion this year.
To help offset any losses, most of the big airlines — including United and Continental — have announced large cuts in service, eliminating unprofitable routes.
"It's no surprise. I was expecting it," Ray Neidl, an airline analyst with Calyon Securities, said of today's announcement. "The two have a very complementary system. Down the road, I'm expecting a merger but it's not any time soon."
"It's going to be good for both companies," he added.
Frequent Flier Merger
Neidl said the two airlines will first work on getting their computer systems talking together, which is often a major stumbling block when airlines merge.
Continental will also remove itself from its membership in the SkyTeam alliance and join with United's Star Alliance.
Through SkyTeam, Continental has been partnered with Delta, Northwest and other airlines. Delta and Northwest are in the process of merging.
By joining with United's Star Alliance, Continental passengers will have easier connections with United and US Airway flights and be able to earn or use frequent flier miles on alliance airlines and have reciprocal lounge access.
Continental will be the 21st airline in the alliance, which also includes Air Canada, Lufthansa and Singapore Airlines.
"There is significant value gained from linking with larger networks to provide truly national coverage and expanded global reach, and exploring new ways to reduce costs and improve efficiencies," Larry Kellner, chairman and CEO of Continental, said in a statement. "As we experience some of the most challenging conditions airlines have ever faced, we look forward to the benefits of a new relationship with United and the other Star Alliance members."
The alliance may take months to implement.
The two airlines note in a joint news release that Continental faces a contractual restriction with SkyTeam prohibiting it from joining another global alliance. That restriction does not expire until nine months after the closing of the proposed Delta-Northwest merger.
Robert Mann, an airline industry analyst and consultant, said the move was a smart one for the two airlines but will have mixed results for consumers.
If United and Continental secure anti-trust immunity from regulators in the U.S. and abroad, they'll be able to coordinate their pricing and their schedules, and that, Mann said, could lead to more expensive fares.
"When you eliminate a series of competitors on the market, the result is you have fewer competitors, and anyone of those is less likely to be a deterrent to raising prices," he said.
With respect to routes, the two airlines complement each other well. Continental, Mann said, has an extensive network across the Atlantic to Europe and Latin America, while United's strength lies in the Pacific and Asia.
The two networks combined could prove to be equal or better than the network that would be created by Delta-Northwest merger, he said.
"I think it makes them fully competitive without actually going through a merger transaction," he said.
Mann also noted that if the deal allows United and Continental to survive in a difficult climate, that could benefit consumers in the long run.
"People just assume you're going to have convenient, low-cost air travel," he said. "You can't make that assumption when one by one is going out of business."