Airline Merger Could Mean Higher Prices

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The U.S. Justice Department announced Friday that it will allow United (Stock Quote: UAUA) and Continental Airlines (Stock Quote: CAL) to merge. Now all that is needed to complete the $3.2 billion deal is a formal vote by the both airlines’ shareholders, which is set to happen Sept. 17. Once approved, the merger will make the combined company the largest airline in the U.S., besting Delta (Stock Quote: DAL) after its merger with Northwest Airlines in 2008. What does this mean for consumers?

The merger, travel experts say, may result in rate increases and route reductions for the new airline, but despite how this may sound, the purported effects are not entirely a bad thing.

Route reductions, according to Seth Kaplan of Airline Weekly, are likely to be minimal since United and Continental don’t traditionally service the same areas. Both carriers operate flights throughout Canada, Latin America, Europe and the Asia-Pacific regions. However, United’s domestic service is concentrated in the Midwest and Pacific, while Continental services the Northeast regions.

Additionally, Continental’s hub cities are based in Houston; Newark, N.J.; and Cleveland. United’s hubs include Washington D.C.; Chicago; Denver and San Francisco. Kaplan believes that Continental’s Cleveland hub may be in jeopardy as United’s larger and more powerful presence in Chicago’s O’Hare airport may render a second hub in that area redundant. However, Kaplan says, this is likely the only major hub that will be affected.

If the company does decide to shut down hubs in smaller markets, the closures may actually help discount carriers, such as JetBlue (Stock Quote: JBLU) and Spirit Airlines (Stock Quote: SPR), cash in.

“Discount carriers can make some headway in the smaller hubs,” travel consultant Lisa Fantino of Wanderlust Women Travel explains. Take, for example, the Justice Department’s requirement that Continental transfer take-off and landing permission at Newark Liberty Airport to discount carrier Southwest Airlines (Stock Quote: LUV) before the Justice Department would approve the merger.

Fantino does point out, however, that frequent fliers may be affected by the merger since any reduction in available flights is likely to make point redemption more difficult than it already is.

“In the short-term, I think they will offer some redemption bonuses in the spring as they look to consolidate their frequent flier programs,” Fantino explains, before adding, "in the long term you are going to find more passengers looking for fewer available seats."

As for prices themselves, the existence of the low-cost carriers and the fact that Delta, American (Stock Quote: AMR) and US Airways remain competitors, will prevent potential fare increases from climbing sky-high.

“Fares could rise modestly in some markets where the two airlines currently compete,” Kaplan says, citing Houston and Chicago as two examples. “They will also likely reduce their combined seat capacity, and that too can push fares up. As with anything, less supply with constant demand will mean higher prices.”

Fantino agrees that fares are likely to see an incremental increase, but also says there might be a reduction in the ancillary fees fliers have increasingly faced in recent years.

“In order to justify an increase in fares, the airlines will have to answer the question ‘what are they going to give us in return?’” Fantino explains. “Airlines have to constantly recycle themselves to figure out what is going to work.”

With the merger slated to go into effect Oct. 1, here’s hoping an all-purpose fare is on the horizon.

For more details on the $3.2 billion deal, check out TheStreet’s article “United, Continental Cleared for Merger.”

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