Airline mergers would dwarf solo-flyer Continental

NEW YORK (Reuters) - A merger between United Airlines and US Airways LCC.N would leave Continental Airlines CAL.N in a tough spot, facing what some analysts called bleak prospects of flying solo among far-larger rivals.

If United, a unit of UAL Corp UAUA.O, and US Airways merged, they would form the second-largest airline in the United States after Delta Air Lines DAL.N and before AMR Corp's AMR.N American Airlines.

Continental would hold its place as the No. 4 airline, but would be dwarfed by the top three airlines. And at its heels would be an array of low-cost airlines, such as Southwest Airlines LUV.N, aiming for wider horizons.

“Continental would find itself in a strategic quagmire,” Joe Schwieterman, transportation expert at DePaul University in Chicago. “They would be playing against global giants that have enormous, all-powerful frequent flyer programs.”

Industry analysts say United’s overtures could be an effort to lure Continental back to the negotiating table, just two years after the two airlines halted merger talks of their own.

Continental called off talks because of its fears over United’s financial condition. Continental opted instead to join the Star Alliance, an airline network helmed by United.

But Houston-based Continental has recently relaxed its stance on consolidation. Speaking at a March 9 conference, Chief Executive Jeff Smisek said the company would “bulk up defensively” if it was in their best interest.

“Size and scale is important in the airline industry, particularly if your competitors are getting significantly larger,” said S&P analyst Jim Corridore.

“Business travelers want to have the broadest range of choice and options possible,” Corridore added.

Continental declined to comment. Continental’s former CEO, Larry Kellner, was unavailable for comment.


Many airline analysts lauded the possible merger between United and US Airways, saying it would take even more capacity out of the industry and help prop up air fares.

Continental would undoubtedly benefit, like the rest of the industry, from less capacity and less competition, industry analysts said.

But the airline also would be left out of any benefits seen by US Airways and United, analysts said. Those two carriers would get a boost from more opportunities to connect different hubs, cut costs and see higher yields.

“At the same time Continental falls behind on those metrics because they’re not changing,” Corridore said. He added: “They probably are considering ways to keep that from happening.”

Analysts have been quick to point out that a merger between United and Continental would be superior because the two airlines have very little overlap in routes as well as pilots who belong to the same union: the Air Line Pilots Association.

Even though United and Continental ended merger talks in 2008, their pilot groups talk up two to three times a week and have continued to discuss the possibility of a merger, said Capt. Jay Pierce, head of Continental’s pilot union.


Pierce told Reuters the prospect of Continental staying solo, while the top three airlines expand makes him “nervous.”

“We are in an industry where size matters,” he said. “When you’re trying to sell to the corporate customers ... that you can get their executive from Houston to Frankfurt on Wednesday and to Dubai on Thursday, you’ve got to have a network large enough to do that -- every day.”

He said the airline could expand by finding another partner -- “You’ve got American, just north of us” -- or entering more code-sharing agreements.

Should Continental be left out of the fray, it might have to transform to remain competitive. The airline could grow organically, become a niche airline serving certain markets or even transform into a low-cost airline, some analysts said.

CRT Capital Group analyst Michael Derchin noted that it was smaller airlines such as Southwest, not big network carriers, that posted profits last year.

“Right now they’re evaluating the probability of a US Airways-United thing happening,” Derchin said. “I’m sure there’s a lot of burning the midnight oil over in Houston these days.”

Reporting by Deepa Seetharaman; Additional reporting by Kyle Peterson in Chicago and Karen Jacobs in Atlanta; Editing by Richard Chang