Air of Teamwork: United & Continental Merge


While it may have been overshadowed by the stock fluctuation fiasco last week, American airlines United and Continental announced a $3 billion merger. Forbes covered the partnership, noting that unlike many mergers, this is more about generating revenue than it is about cutting costs:

Whether it’s airlines, banks or canned food, mergers are usually about cost savings. Eliminate duplication, streamline distribution to the customers and lay people off.

The United-Continental merger? Not so much. This deal is more about chasing revenues by dominating lucrative routes. The combined airline would have hubs in the largest domestic cities, plus an expanded overseas network. So from a standpoint of the pricing power that comes with squeezing competitors at top hubs, the deal makes sense.

What the merger won’t do is advance the big cost-cutting initiative that airlines have been embarking on for the past couple of years–reducing capacity. Airlines are already taking seats out of the sky, with or without merger partners. There are always some duplicative costs that can be cut, but this deal is mainly about revenues.

"When you’re trying to get corporate contracts, and you can say you have the most routes to Europe and that you’re the major airline in New York, Chicago, San Francisco and others, that does a lot," says Seth Kaplan, managing partner at trade publication Airline Weekly. Internationally, United’s strength in the Pacific Rim is complemented by Continental’s South America dominance.

Industry consultant Michael Boyd says, "Cut costs all you want, but the lifeblood of an airline is its revenue stream."

The $3 billion, all-stock deal, will create the world’s largest airline, with some $30 billion in annual revenue. Continental Airlines ( CAL – news – people ) shareholders will get 1.05 shares of stock in United parent UAL ( UAUA – news – people ) for each share of Continental, with the merger expected to close by year-end.

The Obama Justice Department figures to scrutinize the deal more closely than Bush officials did the Delta-Northwest merger, but "It’s hard to imagine any hurdles that can’t be overcome," says Kaplan. It’s also unlikely that the companies’ boards would have approved the deal without feeling confident of minimal objections from the labor unions–an outcome that’s likely given the focus on business growth over cost cuts. The consensus: There will be some labor battles, but no open warfare.