Love is in the air

Together at last

THE announcement of a merger to form the world's largest airline, with the capacity to carry nearly 150m passengers a year, might once have caused a flurry of excitement. But the $3 billion all-share deal to bring together United Airlines (UAL) and Continental Airlines was greeted on May 3rd with a politely stifled yawn. Industry rivals, employees of the two carriers and even consumer advocates—all potential losers from the combination—expressed mild misgivings but concluded that such consolidations were a sign of the times. Wall Street granted lukewarm approval, marking shares in both firms down a little.

Reaction was muted partly because there was nothing surprising about the deal. A couple of years ago, immediately after the merger of two other big American airlines, Delta and Northwest, UAL and Continental tried to follow suit. But record oil prices and the onrushing recession persuaded Continental that it was not the time to take on new risks (not least UAL's rickety finances). Although both airlines made hefty losses last year, the improving economy, recovering business traffic and cheaper fuel created the conditions for a second attempt. However, the trigger for new talks was an impending tie-up between UAL and another carrier, US Airways. Continental's boss, Jeff Smisek rang his opposite number at UAL, Glenn Tilton, on April 9th to tell him that there was a better option. Mr Smisek said this week: “I didn't want to him marry the ugly girl. I wanted him to marry the pretty one, and I'm much prettier.”

Mr Tilton insists that it had never been his intention to use jilted US Airways as bait to snare Continental, but there is no doubt that the deal he now has makes a lot of sense. The two chief executives claim that the combined carrier should benefit from savings of at least $1 billion a year and from substantial extra revenues once operational integration is complete by 2013. The airlines' networks at home and abroad are highly complementary, except in their hub cities, which will allow them to reduce capacity without conceding market share to competitors. Continental's recent decision to join UAL in the Star Alliance should also help. And they now have the example of Delta and Northwest to follow: their merger seems to have gone more smoothly than some others in the past, and is already yielding big savings.

However, there are still a number of hurdles to be overcome. Although the airline unions appear resigned to job losses among the 88,000 employees of both companies, vexed issues such as the seniority of pilots will need deft handling. UAL and Continental, unlike Delta and Northwest, use different booking systems, which will make bringing together back-office functions more fraught. Regulatory approval could also prove trickier than for Delta and Northwest, whose deal was approved by George Bush's relatively laissez-faire Department of Justice. Although the merger is highly unlikely to be blocked, Barack Obama's administration, with its close ties to trade unions, could delay approval or attach unwelcome conditions to a deal the parties are anxious to seal before the end of the year.

Bringing United and Continental together should create a stronger, more financially stable airline, at least in the short to medium term. But it is not a transformative deal. American network carriers will still suffer from familiar ills: over-regulation, high overheads, inflexible unions, elderly fleets and constant attrition from low-cost point-to-point operators. Consolidation can provide some breathing space, but it does not fundamentally alter the dynamics of an industry still riddled with structural inefficiencies.