UAL, CO Chiefs Tout Merger Benefits

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UAL, CO Chiefs Tout Merger Benefits

Unread post by bimjim » Mon May 31, 2010

http://www.aviationweek.com/aw/generic/ ... 20Benefits

UAL, CO Chiefs Tout Merger Benefits
By Darren Shannon
May 28, 2010

Failure to approve the proposed merger between Continental Airlines and United Airlines will produce the fare increases and job losses that worry critics, the top executives from both carriers argued during a May 27 hearing of the U.S. Senate Judiciary Committee’s antitrust, competition policy and consumer rights subcommittee.

Jeffrey Smisek and Glenn Tilton, of Continental and United, respectively, noted that a combined United/Continental would create a company robust enough to reverse the climate of “eking out an existence” and bolster hub operations. This in turn would offer consumers, particularly in small communities, a wider choice through their larger network and frequent flyer programs, and secure jobs that otherwise will be threatened from stronger domestic and foreign competitors.

Tilton, repeating a claim made when the airline announced their merger (DAILY, May 4), said the deal will produce between $800-$900 million in revenue synergies dependent on fleet optimization rather than fare increases, and about $200-300 million in cost savings. “This is good for employees, it is good for communities, it is good for consumers and it is good for competition,” added Smisek.

The other panel members disagreed. Darren Bush, who once served as a Justice Department lawyer and is now an assistant professor at the University of Houston Law Center, said he is skeptical of these efficiency claims, and pointed to an “economic violence” within the airline industry that produces cycles from one period of consolidation to another that reduce supply with limited affect on profitability. “You can’t discount the anti-competitive effects of reduction,” said Bush.

Consumer Union’s Bill McGee also questioned the logic of the merger, arguing that approval would only reduce competition and increase the likelihood of further industry consolidation. Among his nine points against the merger, McGee continually pointed to the effect of reduced resistance to fare and fee increases from an ever decreasing number of competitors.

This increased power among a smaller number of operators will also limit new-entrant growth, and stifle low-cost competition, which tends to avoid direct battles in hub markets, said the consumer advocate. McGee also used the collapse of the U.S. banking industry as a warning against airline consolidation. A merger, he argued, would not only create a giant “too big to fail” with almost 20% market share, any failure or strike action would “have immediate and adverse effects on America’s economy, infrastructure, and even security.”

Questioning from the subcommittee was limited, with Senators distracted by a heavy voting schedule that led to the postponement of an early hearing into airline consolidation by the Commerce, Science and Transportation Committee. What little debate that occurred centered on fare increases and effect any merger would have on domestic operations, particularly to small communities, Continental’s Cleveland hub and United’s operation at Washington Dulles International. As expected, assurances were made, but with caveats on how demand shifts dictate supply.

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