Friday, May 28, 2010

United, Continental Heads Address Antitrust Concerns over Proposed Merger

This posting was written by Sarah Borchersen-Keto, CCH Washington Correspondent.

The heads of United Airlines and Continental Airlines Inc. told a Senate panel yesterday that their proposed merger would not reduce industry competition due to the small number of overlapping routes and the abundance of low cost carriers (LCCs), which maintain downward pressure on prices.

The two airlines announced earlier this month that they would join forces in a partnership that would be completed, pending regulatory clearance, by the fourth quarter of 2010.

Senate Subcommittee Hearing

At a hearing of the Senate Subcommittee on Antitrust, Competition Policy and Consumer Rights, Chairman Herb Kohl (D, Wis.) acknowledged the airlines’ position that the merger was “built to pass” antitrust scrutiny because their routes do not substantially overlap and LLCs “will constrain their ability to raise prices.”

However, he pointed out that the merger will reduce the number of national networked airlines. “Two years ago, we had six, after this merger we’ll have four. So we need to ask the question—at what point do we reach a tipping point for competition?”

Kohl framed the issue as balancing the difficulties faced by the airline industry in recent years with problems faced by travelers today—including frequent delays, puzzling prices, and a decline in service.

“So we must ask the critical questions—how will the loss of competition between these two national systems impact airfares and service? Will a combined United/Continental be a stronger competitor to the previously merged Delta/Northwest or will the large, networked airlines that remain dominate the airline industry across the country and internationally? Will the low cost carriers be able to step in and fill the competitive void or will they feel less competitive pressure to keep fares low or compete by offering things like free checked bags? And how will small and medium sized cities fare after this merger, at the very time that they most need frequent and inexpensive air service for their economic health?”

Airline Responses

United chairman and CEO Glenn Tilton, responding to questioning, said “I don’t think there’s any worry here that competition is going to be lessened by the combination of two companies who do not overlap in the main and are committed to using the combined network to increase frequency of service rather than reducing it.”

Continental chairman and CEO Jeffery Smisek, meanwhile, told subcommittee members that his airline is “eking out a hand-to-mouth existence and, as far out as I can see, we’ll continue to eke out a hand-to-mouth existence.”

By merging with United, “we can create a carrier that will have a future and a future profitability which is good for communities and good for us to be able to continue air service.”

Asked about the likely future of its domestic hubs, Tilton said they are “extraordinarily important markets” with significant business travel demand, “so I don’t think there’s any jeopardy whatsoever to those hubs.”

Low Cost Carrier Alternative

In a joint statement Tilton and Smisek noted that more than 85 percent of passengers traveling non-stop on either Continental or United have an LCC alternative.

“There once was an assumption that LCCs would have difficulty competing at the hubs of network carriers. This assumption has long since been disproven,” the airline chiefs said.

Tilton noted in questioning that low-cost-carrier Southwest Airlines, the largest carrier in the U.S., would still be the largest carrier after the merger.

“In sharp contrast to legacy carriers, they have shown a steady, steady pattern of growth,” Tilton said. “They have shown an ability to accommodate change in their strategy. They’re building a more complex proposition to customers which includes frequent flyer schemes and even connections to international carriers both north and south.”

Darren Bush, an associate professor at the University of Houston Law Center, argued that while some LCCs have managed to penetrate major hubs, generally “the larger the network the easier it is to drive out low cost carrier competition.”

Bush also questioned the real reason behind the United/Continental merger. “It should not be presumed that the merger’s purpose is profit maximization and efficiencies,” Bush said. “[I]t is difficult to see how two organizations in the same dire straits will, when combined, produce a better airline.”

Text of Senator Kohl’s introductory statement appears here on the Senator’s website.

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