United and Continental agreed on a wide-ranging marketing alliance that could provide many of the revenue benefits of a full-blown merger -- but without the financial and operational risks made larger by surging oil prices and the credit crunch. The pact between the two airlines, the nation's No. 2 and No. 4 in terms of traffic, should help them forge close domestic ties and act in concert on international routes.
As part of the plan, Continental will join the Star Alliance, a global marketing group of 20 airlines anchored by United and Lufthansa. The deal, which requires regulatory approval, is a tacit admission that the U.S. airline consolidation rush is dead. The United-Continental alliance could raise the bar for international airline joint ventures because of the size of the carriers and the number of Star Alliance partners they would bring to their venture. And it would serve as a response to the merger plans of Delta. and Northwest.
Mergers promise much larger cost savings than alliances: The combining airlines can get rid of overlapping routes, redundant aircraft and a lot of workers. Such combinations also can produce greater revenue gains, as the broader route network attracts more passengers and corporate accounts. For the past couple of years, it had been assumed that a wave of mergers was going to remake the fragmented U.S. industry into a handful of bigger global players.
That didn't happen. Despite many discussions among many potential partners, only Delta and Northwest have agreed to combine. UAL Chief Executive Glenn Tilton has been a vocal proponent of consolidation for several years. But nothing came of his merger talks with Delta, Continental and US Airways, in part because high fuel expenses have pushed the industry into steep losses and preserving liquidity has become an overriding concern.
Continental, which currently has marketing relationships with Delta and Northwest and is a member of their SkyTeam global alliance, began exploring its options when the two others decided to team up. Continental was wooed by American and BA, two founding members of a third global marketing group, oneworld. But United was aggressive, and the Star Alliance's position as the largest of the global groups was a compelling draw for Continental.
Getty Images The new alliance could boost revenue without the risks of a merger.
Its planned defection to the Star Alliance "shows the vulnerability of these global alliances," says Randy Petersen, editor and publisher of "Inside Flyer," a publication about frequent-traveler programs. "It was always assumed if you joined, you were blood brothers for life." It's a good move for Continental, he says, because Star is the strongest of the global groups, though he says he doesn't think the pact is a prelude to a merger.
The alliance discussions began in late April, shortly after Continental ended merger talks with United, saying it was better off remaining independent in the increasingly harsh industry environment. A month later, United broke off its exploration of a merger with US Airways for the same reasons, and turned its full attention to a possible alliance.
"What they're proposing is much more incremental [than a merger] but it doesn't have the big downside," says Carl Tobias, a professor at the University of Richmond School of Law. "It's very pragmatic. Maybe this is all that can be done now" in a time of high oil prices and industry turmoil, he says.
United has long coveted some kind of relationship with Continental, as their combined route network is complementary and powerful. Chicago-based United is strong in the Pacific and in the western U.S. Continental, based in Houston, has extensive routes to Latin America and a big hub in Newark, N.J.
The partnership with Continental will "allow us to achieve many of the benefits of a merger," Mr. Tilton said in an employee bulletin Thursday. It "will put us both in a position to compete far more effectively than we can today against strong global competitors."
The agreement probably won't go into effect until late next year. Continental must extricate itself from its current relationships, and enter the Star Alliance. Both tasks are expected to take at least a year. Once it is free and wins regulatory approval, it will share passengers with United domestically and on overseas routes through code-sharing, in which one airline puts its flight code on a partner's flights and sells them as if they were its own. The two also would link their frequent-flier programs and airport lounges.
Internationally, they hope to operate as close joint-venture partners, cooperating on schedules, capacity and pricing and, in some cases, pooling revenue. On routes between North America and Europe, United and Continental intend to operate a four-way venture with Lufthansa and Air Canada. Over the Pacific and to Latin America, they hope to operate joint ventures with other Star Alliance members.
These arrangements will require the U.S. government to grant them antitrust immunity; otherwise such cooperation would be deemed collusive. They will have to get other governments to agree to certain aspects of the plan as well. But there are many precedents, including the immunized bilateral relationships United already has with Lufthansa and with Star Alliance member Air Canada.
Mr. Tobias says the plan "is actually a deal that could be done" and should clear regulatory approval, even if the Democrats take the White House in January and antitrust scrutiny becomes more stringent.
Overall, these measures are intended to attract new business and raise revenue. But closer cooperation also could bring cost savings through joint purchasing and possibly a common information-technology platform. At airports, they could share gates and lounges.
US Airways, rebuffed by United as a merger partner, nonetheless said Thursday that it will keep its existing domestic code-sharing and frequent-flier relationships with United.