Oberstar War begins – Continental-United merger under attack

Representative James Oberstar has barely allowed the ink to dry on last week's deal for United and Continental to merge. The chairman of the House Transportation and Infrastructure Committee has come out strongly against the USD3 billion merger, writing to regulators asking them to block the deal. On aviation issues, Mr Oberstar is generally opposed to anything that changes the status quo.

Always a union man, his highly predictable rapid reaction suggests the unions at the two airlines have already started their march on Washington, carrying through on the veiled threats they made in their initial reactions. The action by Mr Oberstar heightens the likelihood that the regulatory review could take longer than the seven months United and Continental were predicting. United-Continental's USD3 billion deal to yield USD1.2 billion in value - conservatively

Post-Bush Administration Washington has, of late, returned to its snail's pace in reviewing such deals, taking nine months to issue a final rule for the US Airways-Delta slot swap. Those two airlines are now appealing the decision through the courts. By contrast, the entire Delta-Northwest merger approval only took six months, clearly indicating that the Atlanta and Minneapolis-based airlines were right to rush their deal to enable them to take advantage of the more business-friendly Bush era. LINK-Delta-US Airways slot swap approved, but FAA calls for blind sale

Three international mega-airlines will result

In a 5-May-2010 letter to the Department of Justice, Mr Oberstar came down four-square against the deal, arguing the antitrust division should block the deal. He cited the likelihood that the US will end up with three international mega-airlines. "If United and Continental merge, another domino in a chain of mergers will fall, and there will be strong pressure for further consolidation. As I predicted when I wrote your predecessor in 2008 on the Delta-Northwest merger, approval of that merger created conditions that have persuaded Delta's competitors to pursue their own combinations. The United-Continental transaction is the latest, but it likely will not be the last," he wrote.

Mr Oberstar opposed the Delta-Northwest merger and he had a dog in the fight since he's from Minnesota. He also put in the House version of the Federal Aviation Administration bill a requirement for the General Accountability Office to study international airline alliances, arguing they are anti-competitive. The provision attached to the FAA reauthorisation bill calls for such alliances to expire after three years, at which time they would have to regain the approval of the Department of Transportation.

Both United and Continental went out of their way to explain how little their route systems overlap - 13 routes, versus 12 for Delta-Northwest - as well as the lack of pricing power that is available to them in today's excruciatingly competitive airline industry.

If past is prologue, then all Mr Oberstar has to do is look at the history of airline mergers in the US to see how little impact they have had on fares. There is plenty of history. Nor have these mergers had much impact on reducing capacity. Certainly network airlines have not grown in the past decade but the highly active new entrant/low cost airlines have consistently and aggressively taken up any slack.

Now a long and tortuous road ahead for UA-CO

United needs this deal to go through quickly. One more major hiccup in the economic environment will give the market a case of renewed jitters. In yesterday's volatile Wall Street dealings, United led the market down, shedding almost a tenth of its capitalisation in a few short hours. Mr Oberstar can claim part of the responsibility for that, even if his opposition was already predicted.

But Mr Oberstar's opposition is probably just the beginning. Senator Kay Bailey Hutchison had also joined in opposition to the deal. Mr Oberstar's letter now almost guarantees the need for Congressional hearings on the merger proposal, in what most long-time industry observers see as just more Washington theatre, signifying nothing substantive.

Even so, regardless of how good a story United and Continental have, they still face a more hostile regulatory environment than did Delta and Northwest. Add to that the fact that their respective unions are up in arms. The unions are now playing the Washington card in order to wrest the kind of deals they want from the two carriers as the price for their cooperation. This is a cynical process, but one which could well backfire.