Airlines Consolidations Could Mean Higher Fares for Travelers

After several years of financial darkness, U.S. airlines are seeing rays of hope. Passenger demand is stronger and costs are under control.

Despite numerous recent fare increases, however, ticket prices are still too low for airlines' liking as they scramble to boost profits in the face of soaring jet fuel prices. The industry's solution? Reduce the number of available seats by gobbling each other up.

A wave of U.S. airline mergers could mean higher prices for travelers as overlapping routes are eliminated, experts said Wednesday as discussions between United Airlines and Continental Airlines coincided with an announcement by AirTran to buy Midwest. And just last month US Airways began a hostile bid for Delta Air Lines.

Such deals are likely to draw regulatory scrutiny, and they raise the prospect for potential labor and service disruptions, as some consumer advocates warn.

Don't tell that to Wall Street. Airline stocks surged on the flurry of maybe-merger news, including Air Tran's hostile takeover bid for Midwest, with other carriers also examining how to combine 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 have set the stage for big changes in the business next year.

"We're off to the races," said airline expert Terry Trippler, 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 (UAUA) United Airlines and Continental Airlines Inc. (CAL) declined comment on whether they are talking about teaming up. But a person close to the airlines who asked not to be identified said they have been exploring a possible combination in discussions that stepped up after US Airways Group Inc. made a hostile bid for bankrupt rival Delta Air Lines Inc. last month. The 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.

Putting together the nation's second- and fifth-largest carriers would produce an airline superpower — the nation's largest — 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 prosperous hub in Newark, N.J., a popular gateway to Europe.

That could enable United, slimmed down from a three-year bankruptcy restructuring that ended in February, and 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 (AMR) American Airlines linking up with Northwest Airlines Corp., and they stress that counterparts routinely talk with one other about consolidation options.

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

Kevin Mitchell, however, said ticket prices would rise significantly and the public can expect service disruptions, repercussions from labor strife and more job insecurity in the airline industry if the carriers merge. He said that if all the deals in discussion come about, there will effectively be three fewer U.S. network airlines in operation.

"Shareholders, advisers and other firms are the big winners here," said Mitchell, chairman of the Business Travel Coalition, an advocacy group. "I would view it, if I'm a business traveler, on the customer service side as many years of unimaginable pain."

Joe Brancatelli, an independent business travel analyst, said consumers already are losers from merger mania — with or without deals being consummated.

"So much management time is being consumed by creating or fighting a merger," said Brancatelli, who runs a Web site for business travelers called "All that time would have otherwise been spent on plugging holes in the already creaky system."

Rep. James Oberstar, D-Minn., who will chair the House Transportation Committee in Congress next year, said he will not hesitate to hold hearings next year to "expose the anti-competitive effects" of airline industry consolidation and to "nudge the Justice Department" to use its power to stop potential acquisitions.

While discount airlines aren't the focus of merger speculation, combining the larger, so-called legacy carriers could provide an opening for budget carriers such as Southwest Airlines Co., JetBlue Airways Corp. (JBLU) and AirTran Holdings Inc. to push their ticket prices higher as well.

Orlando-based AirTran said Wednesday its $290 million offer for rival Midwest Air Group Inc. was rejected but it will continue trying to acquire the Milwaukee-based regional carrier.

Elk Grove Village, Ill.-based United and Continental have many hurdles to clear to make any deal come about.

Regulators could look at the combined airline's added strength in the Northeast as detrimental to competition, with Continental's Newark hub and United's at Washington-Dulles. United already has endured a failed merger with US Airways in 2000 because of regulatory opposition.

United's prickly labor situation also could be problematic after multiple cuts and layoffs in recent years. The carrier's outspoken flight attendants union quickly served notice Wednesday that it has "severe reservations."

"Any type of business combination is historically fraught with difficulties including regulatory problems, huge expenses, corporate governance issues and, most notably, employee relations," said Greg Davidowitch, president of the United branch of the Association of Flight Attendants.

Also, Northwest could block any acquisition of Continental by virtue of the "golden share" it holds in its Houston-based business partner. A 2000 deal between the airlines gave Northwest that power in exchange for letting Continental buy back some of its stock that its code-share ally held.

Nevertheless, United reportedly has for months been studying ways to merge with either Continental or Delta, and the combination of private-equity funding and the willingness of both sides could get a deal done.

The two carriers led a rally in most airline stocks. Shares in UAL (UAUA) jumped $2.01, or 4.6 percent, to close at $45.24, and Continental rose $1.88, or 4.4 percent, to $44.76.