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The proposed merger between Continental and United may put some wind beneath their wings, but probably not yours.
Yesterday United and Continental airlines announced a merger that would create the largest US airline, carrying about 21% of all US air traffic. If it goes through, it will almost certainly help these two companies become more profitable, but that increased profitability may come at your expense.
To understand why, check out this story we shot yesterday, then meet me on other side for more.
As I pointed out in the video, this merger isn’t done yet: both airlines need approval from their shareholders and from federal regulators. But odds are good that it will happen, probably in the final few months of 2010.
One might argue that this merger is good for both the companies and consumers. Certainly it should be a winner for Continental and United: in the press release announcing the deal, they said they’ll save hundreds of millions of dollars in administrative costs by combining their back offices. But maybe consumers benefit as well. In the same press release, the companies say “Customers and communities to benefit from greater, easier access to world’s most comprehensive network.”
While the statement regarding cost savings is probably true, the one about greater, easier access for customers is basically corporate propaganda. Both airlines are already members of the Star Alliance, a network of separate airlines that combine things like flights, lounges and frequent flier programs. So while the convenience factor may increase with the newly combined airline, it’s probably not as important as they make it out to be.
What goes unspoken in the hoopla announcing the merger, however, and something that might be a bigger deal: fewer airlines means less competition. And if past is prologue, less competition often leads to higher prices. It’s a simple concept: if only two airlines serve a specific route, removing one allows the remaining carrier to raise its price.
As you saw in the video above, there are now six nationwide airlines in the U.S.: Continental, Delta, American, Southwest, United and US Air. Soon there will be five. And since US Air is also seeking out a merger partner (they just ended discussions with United) it’s possible there could be only four. The fewer airlines there are, the less competition there will be. The less the competition, the higher the prices.
And there’s more at stake than price alone. Service could also suffer. If there’s only one restaurant in town, or one store, there’s less incentive for those places to provide good service. Airlines are no different. And what about a strike? Today if Continental strikes, we still have United. After the merger, one airline strike eliminates 21% of nationwide capacity.
Of course, there’s no guarantee that less competition automatically leads to these negative outcomes. Nor is it a certainty that mergers permanently eliminate competition: after all, if one airline pulls out of a two-carrier market, allowing the remaining airline to gouge or under-serve customers, a small start-up or regional could come in, offer new choices and create new competition. But in general, when it comes to keeping prices low and service stellar, the more competition, the better.
There’s nothing that can be done about these changes: airlines have been having trouble making money and mergers may be their only salvation. (Although the nearly 8 billion dollars in fees they collected last year haven’t hurt: see this USA Today article.) And we live in a free country: unless it can be proven that the public will suffer, companies should be entitled to do whatever is in their best interests.
But don’t let the happy words in press releases lull you into a false sense of security. Eliminating competition in any business from banking to air travel is always something to keep an eye on because it can eventually result in higher prices, fewer choices and worse service. So keep an eye on this merger and see if US Air is next. And read more about it: here’s an interesting article from travel columnist Ed Perkins that you might like.