Continental and United’s Mega Merger

This week the two loss making carriers United and Continental announced they will consolidate into the world's largest carrier. Routes News looks back at the Delta-Northwest merger to understand the possible impacts of the latest merger on their US and international networks. FULL STORY.

The merger of equals announced this week between Continental and United to form United Continental Holdings, (which will operate under the United brand) is a further sign that consolidation is viewed as a solution for airlines with shrinking passenger numbers or loss-making operations.

While final approval from shareholders and regulators is still required, there are many reasons (both on the operational and revenue side of the business) as to why such a complicated merger of two airlines is actually beneficial, but the main point is that their networks are complementary.

United has a strong presence in the Asia-Pacific (putting aside Continental Micronesia), while Continental has a strong presence in Europe and Latin America. Between them, their US hubs are complementary and scattered across the USA. Continental has New York, Houston, and Cleveland (and Guam through Continental Micronesia), while United has Chicago, Denver, Washington, San Francisco and Los Angeles. Combine these and the new mega carrier will have eight hubs across the USA.

The Networks

There is minimal overlap in the airlines route networks and the destinations they serve. For example, in Asia, both carriers serve five markets: Narita, Beijing, Hong Kong, Shanghai and Osaka - Kansai, but from different hubs, therefore there is not one city pair to Asia that is duplicated. United's capacity is predominately out of the west coast and Continental's the east coast.

For Continental, the majority of the Asia capacity is out of New York (Newark) serving Mumbai, Delhi, Hong Kong, Narita, Beijing and Shanghai. Only Narita is also served from Houston.

Meanwhile, United has no capacity out of New York and instead operates predominantly from the West Coast mainly from San Francisco to Hong Kong, Incheon, Narita, Beijing, Shanghai and Osaka - Kansai. It also serves Tokyo (its Asia hub) from Seattle and Los Angeles. Away from the West Coast, United serves Washington to Narita and Beijing, and Chicago to Hong Kong, Narita, Shanghai and Beijing. Below is a summary of frequencies to Asia.

Weekly Frequencies (by destination) for United and Continental from their US hubs to Asia:

In Europe the carriers combined served 27 airports. Only nine of these airports are served by both carriers and with different hubs, so there are no city pairs that overlap. Obviously some markets may become under pressure regarding their capacity, particularly some of the secondary European hubs which serve a number of the United/Continental hubs, these include Zurich (two), Geneva (two), Munich (three), Rome (three), Brussels (three) and Amsterdam (four). Even Paris, Frankfurt and Heathrow may see some consolidation. Paris has 35 weekly flights to four United/ Continental hubs, Frankfurt has 63 weekly flights to five hubs and Heathrow has 112 weekly flights to seven hubs.

In return there may be a case for Athens, Cologne and Bristol (which have all lost a Continental service) and will be better placed for the new mega carrier.

Routes News has also analysed weekly frequencies (by destination) for United and Continental combined from their US hubs to European points:

Weekly Frequencies (by destination) for United and Continental from their US hubs to Europe:

Learning From Delta-Northwest

It is almost certain that United and Continental will have monitored the relatively successful merger of Delta and Northwest. Can we look at this model to see what might happen to a merged United and Continental under one airline?

The impact on United/Continental's networks is that there is likely to be consolidation and some hubs will gain destinations and frequencies, while others will lose out.

Given that the US aviation industry has gone through a few of these mega mergers recently (with Delta and Northwest and AA and TWA), it is interesting to look at the Delta and Northwest merger today - which completed in October 2008.

The table below shows the weekly flights for the combined Northwest and Delta network for a week in 2008 and 2010. As the figures show, the losers have been Minneapolis, Salt Lake City, Cincinnati, Memphis and JFK. Interestingly the largest hubs, Atlanta and Detroit have grown larger. The larger hubs have also seen the upgrading of aircraft (turboprops to jets). For example, in both Atlanta and Detroit the number of weekly turboprop operations fell by two thirds (62%).

Delta and Northwest's Weekly Flights Pre and Post Merger by Origin

The consolidation was also geographical, as the mature saturated markets of North America and Europe lost the most capacity. The emerging markets of South America, the Middle East and Africa all gained weekly frequencies. In these markets the combined strength of the merged carrier was able to justify the opening of new markets. The following table breaks down the weekly scheduled seat capacity by region in 2008 and 2010 and points to which regions lost and gained the most from the merger:

Delta and Northwest's Weekly Flights Pre and Post Merger by Region

The mergers have similarities with a cluster of hubs in the north and to some extent the east. The airports that need to be monitoring their capacity are likely to be the secondary hubs of Cleveland and Los Angeles, which have already lost capacity over the past two years.

In the case of the United and Continental merger, many of the hubs are centred around large O&D markets and therefore they are possibly less likely to experience such a reduction of capacity at so many of the hubs.

Certainly the largest hubs are likely to see their capacity reinforced with the merger and it is unlikely there will be any consolidation in Houston, Chicago and New York.