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Airline deals could increase costs for fliers

December 14, 2006|From the Associated Press

A long-anticipated consolidation of U.S. airlines could mean higher fares for travelers as overlapping routes are eliminated, experts said Wednesday as talk of likely deals reverberated throughout the industry.

That's one reason any such buyout could draw intensified regulatory scrutiny, along with the potential for increased labor and service disruptions, as some consumer advocates warn.

Airline stocks surged on news that United Airlines and Continental Airlines were holding preliminary discussions and after AirTran Airways launched a hostile takeover bid for Midwest Airlines, with other carriers also examining how to merge to keep up with bigger competition.

Numerous regulatory and other obstacles remain before any deal can occur, but industry observers said all the talks and recent airline restructurings had set the stage for big changes in the business next year.

"We're off to the races," said Terry Trippler, an airline expert with the website MyVacationPassport.com who has been monitoring the industry for 38 years. "2007 is going to be a major year -- we are going to see some major consolidation."

UAL Corp.'s United Airlines and Continental Airlines Inc. declined to comment on whether they were talking about teaming up. But a person close to the airlines who asked not to be identified said they had been exploring a possible combination in discussions that were stepped up after US Airways Group Inc. made a hostile bid for Delta Air Lines Inc. last month. The United-Continental talks were said to be very preliminary, with no deal imminent.

The person did not want to be named because of the sensitive nature of the talks.

Combining the second- and fifth-largest carriers would produce the nation's largest airline, merging United's strengths in the Pacific and western U.S. with Continental's successful operations in Latin America and the Atlantic market and its hub in Newark, N.J., a popular gateway to Europe.

That could enable Elk Grove Village, Ill.-based United, slimmed down from a three-year bankruptcy restructuring that ended in February, and Houston-based Continental to use their combined clout to reduce operating costs and become more profitable.

Analysts say other potential deal permutations that may be explored -- if they haven't been already -- include AMR Corp.'s American Airlines linking up with Northwest Airlines Corp.

But would a mega-airline be good for consumers? That depends on who's asked.

Most experts agree that less competition would boost fares, but some see boons for passengers, too.

Trippler said consumers would benefit in the long run from healthier airlines and, as a result, a more stable transportation system. He said competition should remain strong and fares shouldn't climb much.

However, Kevin Mitchell, chairman of the Business Travel Coalition, said that ticket prices would rise significantly and that the public could expect service disruptions, repercussions from labor strife and more job insecurity in the airline industry if the carriers merged. He said if all the deals in discussion came about there would be three fewer U.S. network airlines in operation.

"Shareholders, advisors and other firms are the big winners here," Mitchell said. "I would view it, if I'm a business traveler, on the customer service side as many years of unimaginable pain."

Shares in UAL jumped $2.01, or 4.6%, to $45.24 on Wednesday, while Continental rose $1.88, or 4.4%, to $44.76.

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