Continental-United Airlines Merger Could 'Send Airfares Skyward'

May 3, 2010 -- Airline passengers across the country should brace for higher ticket prices and fewer flight options if the merger of United and Continental goes through, analysts say.

The merger announced today still has to clear regulatory approval.

The combo would create the world's largest carrier and unseat Delta Air Lines, which recently completed its merger with Northwest. The airline, which would take United's name, would theoretically eliminate redundant routes and would have more control over prices.

"For consumers, that improved pricing power may translate to higher prices, perhaps reversing the record since deregulation of declining real prices for air travel," said airline analyst Robert Mann.

In a news conference this morning, executives from both airlines said they didn't set prices before and won't set prices after such a merger.

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Travelers might also find it harder to get from one place to another as the airlines reduce the frequency of some flights and even decide to pull out of some markets.

For instance, Harrisburg, Pa. to Minneapolis, Minn. used to be served by seven airlines: AirTran, Delta, Northwest, American, US Airways, United and Continental, according to George Hobica, president of airfarewatchdog.com. Thanks to the Delta-Northwest merger and a United-Continental's combination that route would now be served by five airlines.

"In general, as consolidation progresses, there will be fewer flights between small cities and these will be operated by regional jets, if at all," Hobica said. "But nature abhors a vacuum and Southwest, AirTran and other discounters will come to the rescue on some routes if other airlines eliminate service."

Ticket prices are going to go up merger or not, according to Rick Seaney, CEO of airfare-search site FareCompare.com and an ABCNews.com columnist.

"Last year we were at decade lows so they have no place but to go up -- the question is how much," Seaney said. "The pendulum on supply and demand has swung in the airlines favor as summer bookings are very strong and corporate travel continues to perk back up to 2008 levels."

That said, ultimately, consumers will pay more because of a merger.

"One of the main factors in the price an airline ticket is competition, the lack thereof after this merger is likely to send airfares skyward," Seaney said.

The Push for Airline Mergers

The airline business has never been easy but in recent years the industry has suffered dramatic losses from high oil prices and the near-disappearance of business travelers, who often pay steep prices for last-minute tickets or first-class seats. Legacy carriers (United and Continental being two of them) have also fought so-called discount carriers like Southwest, AirTran, Frontier, Virgin America and JetBlue who fly younger, more-fuel efficient aircraft and have less debt. The solution has been to merge with the competition.

"Airlines have lost billions, even in good economic times, and they've tried everything to become profitable: wage cuts, capacity cuts, new fees, and higher fares. Consolidation may be their last hope to stop losing money," Hobica said. "The only ones who are making tons of money are the top brass at the airlines."

Delta and Northwest are just the latest in a string of recent mega-mergers. In 2005, America West acquired the bankrupt US Airways and took on the US Airways name for the newly-combined airline. The year before, Air France acquired KLM Royal Dutch Airlines and changed its name to Air France KLM. While the two coordinate on routes, they still operate two separate brands.

In the case of United and Continental, the two airlines' routes don't have a lot of overlap and would complement each other. Chicago-based United currently has hubs in Chicago, Washington, Denver, San Francisco and Los Angeles. While Houston-based Continental has hubs are in Houston, Newark, N.J., and Cleveland.

United's domestic routes are concentrated in the Midwest and Western states. It dominates the market in flights from the mainland to Hawaii and has a major foothold in routes to Asia and Australia. Continental focuses domestically on the South and East, has a strong presence in Mexico and the Caribbean and operates a southern Pacific hub out of Guam. United flies to 100 cities that Continental doesn't and Continental flies to 136 cities that United doesn't serve.

FareCompare's Seaney said that minor overlap -- "basically a few flights in and out of each other's hubs" -- is so small that smaller cities won't be hurt "overly hard unless the combined airline sees fit to pull back capacity."

"Continental has been relatively stubborn about cutting capacity compared to United," he added.

United and Continental's Merger History

This is not the first time the two airlines have considered merging. In 2008, the United and Continental were close to a deal but Continental pulled out at the last minute, wary of United's debt load.

After emerging from bankruptcy in 2006, United has put its financial house in order. Its losses are significantly less than past quarters and revenue is up 15 percent. United also now has $4.5 billion in cash on hand.

The new company would be based in Chicago but Continental's chairman, Jeffery A. Smisek, would be the new chief executive.

Frequent fliers won't see much of a change since Continental recently switched its frequent flier and marketing alliance from Delta's SkyTeam to United's Star Alliance.

Mann, the aviation analyst, said the combined airline would give Smisek a chance to write the next chapter in the Continental story, the prior one being "From Worst to First."

For United's CEO, Glenn F. Tilton, Mann said, the merger would be vindication of his efforts to reorganize United after bankruptcy and "and his 'urge to merge', though perhaps not across borders as he originally hoped."

Would Boeing Benefit from United-Continental Merger?

The merger could also mean a victory for Chicago-based aircraft manufacturer Boeing. United brings 386 planes to the table, a mixture of Airbus and Boeing aircraft. Continental's fleet of 351 is exclusively Boeing.

The merger leaves American and US Airways as the only remaining legacy airlines and Seaney said a merger between them is "very unlikely."

US Airways had flirted days ago with United but broke off those talks as the separate United-Continental discussions progressed.

Seaney said that the relatively small US Airways also probably won't be able to merge with the low-cost carriers who have a completely different business model: point-to-point route networks compared to the hub-and-spoke system the legacy airlines use.

"Unfortunately," Seaney said, "it looks like US Airways is the odd person out in merger musical chairs."

With reports from ABC News' Matt Hosford