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United-Continental Link

United-Continental alliance unlikely to have significant fare impact

Jul 14, 2009

CHICAGO - A new alliance between United Airlines and Continental Airlines Inc may quickly yield cost benefits for the two, but travel demand - especially on international routes - is too weak for the partnership to prop up fares in the short term.

The carriers last week won limited immunity from the U.S. Transportation Department allowing Continental to join UAL Corp's United in the global Star Alliance.

The pair likely will see financial benefits in the form of cost cuts after the completion of the new link. But in order for higher fares to take hold, the entire industry must rein in the number of seats for sale.

"They'll just cut capacity to the point where they can generate some pricing power," said airline consultant Robert Mann. "I don't think we've seen all the capacity cuts on the international yet. I think you'll start to see them coming in very, very sharply across the winter."

The airline industry, long battered by overcapacity, is in the midst of a sweeping effort by carriers to downsize.

It may take several months for Continental to end its relationship with the SkyTeam airline alliance and fully join the Star Alliance. At that point, however, United and Continental can begin to share pricing, scheduling and other information.

Continental and United got word last week that they had received limited immunity from antitrust law. The carriers say the partnership will spur competition on international routes between airlines that enjoy such immunity.

Some experts, however, say their link will, in fact, diminish competition on routes where the two airlines currently overlap.

"Now instead of two airlines competing, it's ultimately one," said Morningstar analyst Basili Alukos.

The antitrust immunity, however, does not extend to domestic travel, and Alukos noted that international travel demand is so depleted by the economic recession that efforts to bolster it may be in vain for now.

"You're seeing domestic travel kind of troughing, bottoming, potentially flat-lining," Alukos said. "Whereas international, they were late to the game to start falling, and now it's going to continue to fall a little longer."

In its July 10 decision to grant antitrust immunity, the U.S. Transportation Department excluded several city pair markets where business travelers may suffer due to lack of competition.

Those routes include city pairs such as New York-Copenhagen and Cleveland-Toronto. Routes from the United States to Beijing also are excluded from immunity.

UAL and Continental initiated the partnership last year after a previous merger proposal failed. The Star Alliance was created in 1997 with member airlines offering a combined 17,000 daily departures to 160 countries.

The nearly two dozen members of the Star Alliance include US Airways Group Inc, Deutsche Lufthansa AG, Air Canada, Air China Ltd and Thai Airways International.

United-Continental alliance unlikely to have significant fare impact
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