Would a United-Continental merger pass muster?

As part of Merger Mania 2008, United and Continental are now in talks to merge. United has been eager to merge with someone — anyone — for a few years now, but Continental has been reluctant to do so, preferring to remain profitably independent and well-managed unless industry-wide consolidation forces its hand. There are any number of challenges to a merger, from labor to systems integration, but one of the biggest hurdles is the Justice Department’s antitrust division, which can put the kibosh on any proposed matchup. I previously wrote about the criteria the department uses to evaluate proposed mergers, so let’s look now at how a United-Continental merger would stack up.

As far as reducing competition in markets or city-pairs, United and Continental are unique in that all their hubs — save the smallest in a combined carrier, Cleveland — are in markets with two or three major airports and/or with lots of network and discount airline competition:

• Chicago — two airports; competitors include American (at O’Hare) and Southwest (at Midway)
• New York — three airports; regional competitors include US Airways, Delta, American, and JetBlue
• San Francisco — three airports; regional competitors include Southwest, JetBlue, and (at SFO) Virgin America
• Denver — one airport but intense competition from Frontier and Southwest
• Houston — two airports; regional competitors include Southwest
• Washington — three airports; regional competitors include US Airways, Southwest, JetBlue, and AirTran
• Los Angeles — five airports; competitors include Delta, American, Southwest, and Alaska (at LAX), and JetBlue (in the region)

Another key factor is that Continental‘s and United‘s route networks do not overlap much, so a merger is not likely to reduce competition in any of these markets.

What about city-pairs with constrained competition? These sorts of city-pairs most commonly occur in small markets near two airlines’ hubs but too small or too far from other airlines’ hubs to warrant service. If you look at the regional distribution of United-Continental hubs (see below), you’ll notice that no two hubs share the same market area, except for Cleveland (a hub that will probably be axed in a merger deal in favor of Chicago).

Without dominating any single region, United-Continental would find, compared to other potential merged airlines, fewer competition-inhibited city-pairs. The Justice Department is not likely to find major competitive problems with a United-Continental tie-up.

Furthermore, United’s and Continental’s international concentrations are complementary: Continental has extensive European and Caribbean and limited Asian service from Newark and extensive Latin American service from Houston. United offers extensive Asian service from San Francisco and Los Angeles and European service from Washington Dulles. The international combination will not likely pose competitive challenges to the merger.

As with Delta-Northwest, one big question for the Justice Department will be whether a big merger is the only way to generate the efficiency gains a merger is supposed to provide. And as with Delta-Northwest, I don’t see this merger providing those gains. Furthermore, neither party is about to go bankrupt and exit the market, making that antitrust consideration unnecessary. Due to Northwest’s golden share in Continental, the Justice Department will be considering any merger proposal in light of the fact that it will have already approved Northwest and some other airline for a combination. In the context of other big deals being approved, there would be no compelling reason for Justice to reject a United-Continental merger.

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