Friday, June 20, 2008

United and Continental's New Alliance

Less than two months after merger negotiations were called off, Continental and United Airlines announced an alliance between the two which would allow for linking international networks, technology sharing, and honoring each other’s passenger benefits.  Under the new agreement, Continental will join the Star Alliance, the world’s largest alliance network, which was co-founded by United and includes notable foreign carriers such as Germany’s Lufthansa and Canada’s Air Canada. In order to take full benefit of alliance opportunities, the carriers will have to receive antitrust immunity from both the United States and the E.U.  Such immunity would allow for greater streamlining and collaboration, particularly on flight scheduling, marketing, and the choice of aircraft for particular routes.

Yesterday’s announcement, while no doubt a surprise in light of speculation that Continental was poised to announce a similar alliance arrangement with American Airlines, offers a few hints on the continued vitality of United Airlines.  Despite not being able to pull off a substantial merger either Continental or Delta Airlines, clearly they remain enough of a competitive force to attract a deal which won’t even begin to pay dividends for nearly a year or more.  (Before Continental can fully get on board, they must give nine months notice to their current alliance network, SkyTeam, and that will have to wait until the announced Delta/Northwest merger receives regulator approval.)  As many analysts have pointed out, this also brings the carriers one step closer to a full-on merger.  Should that go through, Continental and United would become the single largest carrier in the world—a prospect which may look less inviting in a market made volatile by spiraling fuel costs but may, in fact, prove opportune after the new alliance’s benefits are reaped.

With that said, it should not be forgotten that the alliance system is, in many instances, a necessary half-measure prompted by abiding ownership and control restrictions worldwide.  While the EU has indicated during both stages of the “Open Skies” negotiations with the U.S. that it would be more than willing to relax restrictions reciprocally, the U.S. has held fast to the current foreign investment cap of 25% voting stock, 49% total equity.  With mergers options essentially foreclosed at the international level, carriers like United and Continental are forced to look at a dwindling number of partners; assuming everyone is in the (relatively) same financially unstable boat, mergers appear not only risky, but outright dangerous.  On the other hand, cash-rich EU carriers such as Lufthansa and British Airways, both far better insulated from rising fuel costs due to the relative strength of the euro in relation to the dollar, could greatly expand the merger horizon by offering greater stability and expanded international access.  But dreaming of such things won’t make them a reality.  For U.S. airlines trying to survive today, they’ll take what they can get.

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