Aviation

Airlines' merger may cause ripples

The combining of United Airlines and Continental could eventually mean higher fares for passengers and might affect production of Boeing planes.

On Monday, United agreed to buy Continental in a $3 billion-plus deal that would create the world's largest carrier with a commanding position in several top U.S. cities.

The new United would surpass Delta Air Lines in size, which should help it attract more high-fare business travelers. It will fly to 370 destinations in 59 countries.

It could eventually mean costlier tickets for travelers, said Devin Hansen, president of Sunflower Travel Corp. in Wichita.

"It means less competition, which probably ultimately means higher prices," Hansen said.

Continental has five daily flights from Wichita Mid-Continent Airport to Houston. United has five daily flights each to Chicago and Denver.

The Justice Department is examining the competitive effects of the move. The department routinely examines airline deals that may affect services and prices for consumers.

It is not clear what effect the deal would have at Mid-Continent Airport, a spokeswoman said.

"I think it's pretty early in the game to know if this is going to have any impact at all," said Valerie Wise, air service and business development manager for the Wichita Airport Authority.

An airline consultant said the deal could also affect the airlines' orders for new Boeing airplanes.

According to Boeing's website, United has orders for 25 787s while Continental has orders for 25 787s, 41 737s and three 777s. Parts of all those airplanes are manufactured by Spirit AeroSystems.

"The potential exists that some orders might be canceled but it's unknown at this point," said Lillian Tamm, a vice president at industry consulting firm Avicor Aviation in Beaverton, Ore.

Tamm said there are a variety of factors that could affect orders, including any penalties either airline would incur for canceling planes as well as what their need is for new aircraft.

But because airline mergers are partly driven by the potential to shave operating costs, orders for new airplanes are one of the things company officials will soon examine.

"There would probably be a reassessment of the whole picture from the top down," Tamm said.

The airlines said combining would save them $1 billion to $1.2 billion a year by 2013, in addition to providing between $800 million and $900 million in new yearly revenue.

United shareholders will hold a majority stake and the airline will be based in United's hometown of Chicago.

It would be run by current Continental CEO Jeffery Smisek, however. United CEO Glenn Tilton, a longtime advocate of consolidation in the airline industry, will be non-executive chairman for up to two years before Smisek adds the chairman title.

The new parent company will be called United Continental Holdings Inc., and have about $29 billion in annual revenue based on 2009 results and $7.4 billion in unrestricted cash.

The deal will leave three big U.S. airlines with major international routes — the new United, Delta and American Airlines. US Airways is a distant fourth.

United is the nation's third-largest carrier by traffic, while Continental Airlines Inc., based in Houston, is No. 4.

Wall Street has pushed consolidation as a way to let airlines raise fares by reducing the number of flights and seats. But Smisek and Tilton said even a larger United won't have the power to boost prices because other carriers might undercut them.

Henry Harteveldt, a travel-industry analyst for Forrester Research, said the new United will have more success raising fares on business travelers.

The companies expect to close the deal in the fourth quarter, with approval needed from shareholders and regulators.

Officials for the two airlines said it was too early to know what the impact of the deal would be on their 10 hub airports, which stretch from Newark, N.J., to Guam. They said they will eliminate some headquarters jobs in Houston and Chicago, but gave no numbers.

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