Great news for United flyers - Continental's board decided today to pull out of merger talks and has issued a long statement explaining their decision to not merge with anyone at this time:
We want you to know that our Board of Directors met today and has
unanimously supported management’s recommendation that, in the current
industry environment, the best course for Continental is to not merge
with another airline at this time.
...
The Board very carefully considered all the risks and benefits of a
merger with another airline, and determined that the risks of a merger
at this time outweigh the potential rewards, as compared to
Continental’s prospects on a standalone basis.
...
Most importantly, we have our Working Together culture, and we will ensure it remains intact.
As I recently said, Continental and United's corporate cultures do not match and a merger would have been a disaster both for the companies and their frequent flyers. I'm glad they finally realized this.
United's huge reported losses last week certainly helped make the decision easier for Continental. United does not have great long term prospects in its current state and Continental's management would rather keep improving Continental than trying to salvage United. I don't blame them.
Now what for United?
This will certainly cause a panic at United. Their CEO's plan has been to merge so that he can get out. Now what? My bet is that they quickly pick between US Airways (US) or American Airlines (AA).
Why some people will flock to a United and US Airways merger
US may seem like the easy choice for a few reasons:
- United and US are both already in the Star Alliance, which means they already have essentially the same codeshare partnerships with other international airlines and each other and it would therefore be easy to facilitate the merger from the international alliance standpoint
- US is smaller than AA so presumably it will be easier to justify the merger to the DOJ
- US and UA tried to merge in 2001... now a lot has changed in 7 years, but they still have that prior history to consider
- US adds a Southeast hub (CLT) and lots of Northeast airport slots that United is currently missing
But really, US doesn't add much for United. They overlap on most of their routes and US doesn't bring any large number of new lucrative routes for United. The overlap would allow them to reduce a lot of capacity but I'm not sure it brings enough value to the table to make it worth it.
There differences are extensive. US flys 2 cabin international where United flys 3 cabin. US' frequently flyer program doesn't match up with United's in for most of the reasons that Continental's didn't. And US is still in a mess from the America West/US Airways merger.
Why United and American are the best match for each other
AA makes more sense and is my recommendation for United:
- American is in trouble like United and needs to find a way to deal with the rising fuel costs. A merger with UA creates an opportunity for the combined company to benefit from each others strengths but also cut costs big time
- AA covers South American and India - a great addition to UA's Asia routes - this would make the combined American United have equivalent global coverage as the new Delta and is the only combination that creates an equal competitor to the new Delta
- AA's frequent flyer program operates almost exactly like United's
- AA flys 3 cabin planes internationally on most of their routes like United
- and a merger with UA would allow AA to get rid of their fuel hogging MD80s to save money and reduce capacity in a huge but also fiscally responsible way
The cost savings from reducing capacity and the lower fuel costs by dropping the MD80s may just be enough to keep the new combined American United flying.
I also tend to think that it could make it through regulatory approval assuming the Delta/Northwest deal happens also. An American United merger would provide an equal global competitor to the new Delta and with the MD80s grounded the new American United probably wouldn't be too big to pass the DOJ in this environment.
The big merger problem that doesn't have an easy solution
The biggest issue with an American United merger (and even a United / US Airways merger) is dealing with the labor fight. The only way a merger between United and US or AA will save money and make sense is to eliminate a lot of domestic overlapping capacity.
They won't be able to accomplish the PR spin that Delta/Northwest have been getting away with by claiming there won't be big layoffs after their merger. Make no mistake, a merger between American, United and US Airways - whichever way it goes will mean layoffs. Lots of them. Labor will not be happy. Expect a big fight.
Rumors are going to be flying every which way. This is going to be an interesting week.
