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Rumors Fly of Airline Mergers

Potential combinations in the industry could result in expanded routes and better service but also higher fares and fewer flights.

September 16, 2006|James Gilden | Special to The Times

As airlines emerge from bankruptcy proceedings and begin to report profits, there is much speculation among industry insiders and analysts about possible consolidation.

Older airlines -- the so-called legacy carriers -- are the primary subjects of speculation.

"I think consolidation is inevitable," said Jared Blank, publisher of Online Travel Review, an airline industry news website.

"Anytime the airlines' financial situations improve they tend to get a little more aggressive," he said, "and after a few good months I'm not surprised that these rumors are coming up."

No one has a bigger stake in possible consolidation than business travelers.

Among the possible changes to watch for: Higher fares, expanded routes, reduced capacity with fewer flights and seats, a more stable industry and improved service.

Recent speculation has revolved primarily around two possible pairings, one between Delta Air Lines Inc. and Northwest Airlines Corp., which are both struggling through bankruptcy, the other between UAL Corp.'s United Airlines and Continental Airlines Inc. Analysts say the airlines within each rumored pairing are potentially compatible because of complementary route networks.

Delta is the largest carrier for transatlantic travel, after recently surpassing British Airways, and is strong on the East Coast and in Europe, while Northwest is strong in the Midwest and in Asia.

United is strong in the Western United States and Asia, while Continental is strong in the South and Latin America. On the surface, at least, these marriages would appear to be sensible. But that doesn't mean they will necessarily be happy ones for travelers.

Should consolidation occur, one effect probably would be higher fares.

"I have yet to see the elimination of competition bring the price down," said Minneapolis-based Terry Trippler, a longtime Northwest Airlines watcher and airfare analyst for MyVacationPassport.com.

The upside for travelers would be increased stability in the air transportation system, Trippler said, with the prospect of fewer bankruptcy cases and less labor strife.

Another major effect on consumers could mean a reduction in capacity; this means fewer flights, fewer seats.

"I think there's a lot of desire among the fans of the legacy carriers to reduce capacity," said Michael Roach, a principal in San Francisco-based Roach & Sbarra, an aviation consulting firm. Roach was the co-founder and first president of America West Airlines and a former senior executive with Continental.

Capacity has already been reduced significantly.

Domestic available seat-miles, a measure of airline capacity, were down 3.3% in May from a year earlier and down 2.5% in the first five months of the year over the same period last year, according to the Department of Transportation. Domestic passenger load factor, a measure of how full airplanes are flying, was 80.5% in May.

Some analysts believe that capacity has been reduced as far as it can reasonably be reduced.

"When airlines are 80% full you can't argue that there is too much capacity out there," said Mike Boyd, president of aviation consultant Boyd Group Inc. in Evergreen, Colo. He scoffed at the notion that simply because United and Continental have compatible networks that they would make suitable merger partners.

"So do the dealer networks of Toyota and Ford," he said. "There is more to a merger than just a route system."

Reduced capacity would mean not only higher fares, but also fewer frequent flier reward seats. And in an airline merger, elite frequent fliers in one carrier's program would find themselves competing for upgrades and other perks with the elite fliers of another carrier.

For Los Angeles area travelers, the biggest effect would be felt from a merger between United and Continental.

United is the No. 1 airline flying out of Los Angeles International Airport, operating nearly 400 daily flights on United, Ted and United Express.

Continental operates just 20 flights a day from LAX. Merging its network with United's would offer United business travelers easier access to Latin America through Continental's hub in Houston.

For their part, the airlines are not commenting on merger possibilities.

"We do not respond to rumors or speculation about that," United spokeswoman Robin Urbanski said.

Continental has issued a statement that appears designed to quiet speculation.

"We have repeatedly said that our preference is for us to grow alone and avoid some of the challenges that mergers bring," said the statement.

One of those challenges would be merging two very different approaches to air travel.

At a time when most legacy carriers have slashed amenities, Continental has established a reputation for good service by maintaining things such as meal service on flights.

In a recent J.D. Power & Associates passenger survey, Continental ranked No. 1 among the legacy carriers, with passengers citing its in-flight service.

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