Cambridge Aviation Research Blog

Our recent Quick Take report, "Antitrust Concerns Unlikely to Derail Proposed United-Continental Merger", studies the impact of this proposed merger on competition at the industry, airport, and route levels. Using the Herfindahl-Hirschman Index (HHI) to quantify increases in market concentration and applying the Department of Justice's published guidelines, we "red-flag" fewer airports and routes for this merger than for the just-completed Delta-Northwest combination.

But times have changed. While the "government is cool" meme of President Obama's first 100 days may have lost its luster, there is no doubt of the administration's commitment to an environment of "reinvigorated regulation".

Just ask Delta CEO Richard Anderson who pointed out during an earnings call that their proposed NY-DC slot swap with US Airways "has been pending longer than the merger of Delta and Northwest." And today's Wall Street Journal brings us an article by Susan Carey, "Airline Deal Faces a Tough Review"—in which we are honored to be mentioned—citing former DOJ lawyer Makan Delrahim who predicts "a tough and lengthy review process."

What's management to do?  Our advice is simple:

1. Don't take approval for granted.  In its May 4 story, "Continental-United merger to get hard look from regulators", The Washington Post reports on the attitude conveyed by management during a conference call held on the day of the announcement:

Continental chief executive Jeffery A. Smisek, who would become the head of the merged company, told analysts and reporters in a conference call Monday that the deal should "readily pass muster" with regulators.

"We know what the process is, we know what the law is, we know how the markets are defined. We have done a very rigorous analysis," he said. "There are no two carriers that you could put together in a more complementary way than United and Continental."

As long as the petitioners are experts on the law and have "done a very rigorous analysis", there's really nothing left for the DOJ to do but rubber-stamp the application, Smisek seems to intone. And that's simply not the sort of attitude which plays well with regulators under any administration.

2. Repeat after me: "We're Number 3!"  You've seen the headlines and read the coverage: "Behemoth", "Mega-merger", "World's Largest", etc. Such superlatives can help excite employees and investors in these early days, but here again we counsel a more muted tone when meeting with the Antitrust Division.

While the combined United-Continental will clearly capture the #1 slot in gross revenue and revenue passenger miles (RPMs), use to your advantage that the new airline will still carry fewer passengers domestically than either Delta or Southwest. You might want to bring along this picture of a decade of eroding passenger share from our report:

Seen in this light, after a decade of steady losses, the proposed merger merely sets the clock back and restores United's market share to that of 2000.

3. Be proactive. You already know where the combined airlines will be over-concentrated—though feel free to buy our report if you could use a handy list of red-flagged airports and routes. Take Newark as an example; you clearly have more capacity—in slots, gates, and other facility leases‐than you could possibly want. Why not demonstrate a willingness to work with regulators and airport officials by volunteering to surrender some of this excess capacity proactively? It's a win-win and builds some much-needed good will. And in this new environment, you're going to need all the good will you can find. Your goal of achieving SOC in the first half of 2012 doesn't leave much time for a trip through the federal court system.