Companies & Industries May 5, 2010, 11:01PM EST

United and Continental Reach for the Sky

(page 2 of 2)

Antitrust Review

Things won't go nearly so smoothly for Smisek, who must convince regulators that the Continental-United marriage would not significantly reduce competition. Currently, United is the third-biggest American carrier by traffic (Continental is No. 4) behind Delta Air Lines (DAL) and American Airlines (AMR). The combined airline would leap to the front of the tarmac, raising fears that it could amass too much pricing power—especially on high-fare international routes frequented by business travelers.

A United-Continental combination would surpass Delta as the top U.S. carrier on routes across the Atlantic with a 40 percent share of passenger traffic. The duo would handle 53 percent of all traffic on Pacific routes (United is the leader now), based on data compiled by Bloomberg. In the U.S., the two airlines have overlapping nonstop flights in 13 markets.

True, U.S. antitrust authorities have allowed lots of industry consolidation in recent years. Washington approved the 2008 merger of Delta and Northwest and US Airways Group's merger with America West Holdings in 2005. That was during the Bush Administration. The Obama Administration Justice Dept.'s antitrust division led by Christine Varney is another matter. She's expected to scrutinize the Continental-United tie-up closely. Varney has already raised questions about the competitive impact of existing international airline alliances that share some flights but stop short of mergers. Last June, DOJ called for limits on Continental's earlier request to coordinate flights overseas with United, saying the plan was "unprecedented in scope and breadth, sanctioning collusion."

Downplaying the Worries

The department "signaled quite strongly, in my view, that it would be very skeptical of a complete merger between United and Continental," said Mark Popofsky, co-head of antitrust at Ropes & Gray in Washington and a senior counsel in President Bill Clinton's Justice Dept.

United and Continental downplay worries about air pricing, noting discount carriers now command more than a quarter of domestic traffic. "This is a brutally competitive industry," Smisek said after the deal was announced. "We couldn't set airfares before this, we can't set airfares after this. We are responsive to demand."

Still, some industry insiders believe regulators may force route divestitures or the sale of some of United and Continental's takeoff and landing slots at coveted airports in the New York and Washington areas. Says James Burnley, a partner at Venable in Washington and U.S. transportation secretary under President Ronald Reagan: "It's by no means going to get automatic approval."

The bottom line A merged United-Continental must assuage competition regulators without losing scale advantages that make their marriage attractive.

Schlangenstein is a reporter for Bloomberg News in Dallas. Credeur is a reporter for Bloomberg News in New York. Hughes is a reporter for Bloomberg News in Washington. Bliss is a reporter for Bloomberg News in Washington.

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