Regionals Brace for UAL-CAL Merger

 - May 19, 2010, 10:31 AM

The regional airline partners of United and Continental Airlines will no doubt face a period of some uncertainty as the major airlines prepare to merge their operations into the world’s largest international airline. Few of the airlines can know for sure how each of their operations might feel the effects of the planned merger, but it appears the various airlines that fly as United Express, Continental Express and Continental Connection can at least take some solace in the fact that United’s and Continental’s domestic networks tend to complement each other, and that the combined carrier will continue to fly to all the communities each airline now serves.

Now flying to eight domestic hubs, the combined carriers maintain relationships with 12 separate regional airlines spread across the U.S. No longer truly divided by geography, the United Express network now consists of eight partners, including Atlantic Southeast, which connects Washington and Chicago with various points east; Colgan Air, which flies out of Boston, New York

La Guardia, Houston and Washington Dulles; Mesa Air Group, which flies out of Denver, Chicago and Washington; Shuttle America, which flies out of Atlanta, Chicago, Denver and New York; GoJet, which flies from Chicago, Denver and Washington; Trans States, which operates from Chicago and Washington; and ExpressJet, which flies from Washington and Chicago.

Continental, meanwhile, employs ExpressJet, Chautuaqua Airlines, Colgan Air, CommutAir, Gulfstream International Airlines and Cape Air in a similarly complex network emanating from hubs in Houston, Cleveland and Newark, and to and from points covering virtually every region of the U.S., the Bahamas and Guam.

Although United has talked of enhancing service to underserved small- and medium-sized communities, it stands to reason that some secondary cities such as Albany, N.Y., could become vulnerable to cuts. For example, United and United Express fly to Albany from Chicago O’Hare and Washington Dulles, while Continental’s regional affiliates serve Albany from Newark and Cleveland. Depending on how the “new” airline decides to serve Albany, it seems doubtful that all the connecting options to four major hubs will survive. “That falls into I think exactly what [United and Continental] are looking for, opportunities to cut capacity,” said Teal Group analyst Richard Aboulafia.

“One of the good things about this merger is there is relatively little geographic overlap,” said Aboulafia. “So it’s not as though you can really see some regionals getting hurt, [as if the merger] were with US Airways. The Newark position, of course, with Continental Express, that doesn’t look terribly affected. Conceivably, some regional traffic out of Houston [could go away], but not much to speak of.”

In fact, only 14 domestic cities served by the two carriers overlap; but even if United keeps its promise to maintain service to all the cities the two airlines serve today, more efficient use of the various hubs and spokes will change service patterns, and likely lead to more efficient use of the regional partners. If, for example, the “new” United finds that eastbound passengers from Green Bay flock to the new Green Bay-Cleveland service recently launched by Continental, it could maintain the service and remove some of its capacity from Green Bay to Chicago.

“That’s certainly one they’ll look at,” said Hamlin Transportation Consulting president George Hamlin. “It’s probably more efficient in economic routing to go to the Northeast via Cleveland than it is Chicago because the geography of it is more direct and you’re going into and out of a crowded hub [in Chicago]. Put it this way, the loss of Green Bay and Chicago wouldn’t be meaningful. There’s traffic to be flowed west and south via Chicago. But a smart operator would find a way to optimize the two.”

Meanwhile, many destinations out of Cleveland could prove ideal for an aircraft the size of an Embraer E170/175 or Bombardier CRJ700/900–airplanes Continental may not operate under the terms of its present scope clause. The scope clause at United now allows airplanes that carry up to 76 seats, while the Continental clause for regional jets has remained at 50 seats for many years. Although Continental Connection’s Colgan Air affiliate flies 74-seat Q400s, 50-seat Embraer ERJ145s have dominated its regional fleet since former Continental Express CEO David Siegel negotiated with Continental management for their acquisition in the mid-1990s.

The Continental pilot roster hasn’t yet addressed the issue publicly, but scope could certainly stand as one of the major points of contention when the groups negotiate to merge their seniority lists. “Given the fact that one of the two carriers is not dealing in this size space, there’s going to be some negotiation in all likelihood,” said Hamlin. “At the upper end of the regional business that might open up some opportunities in the Continental system,” he added. “There’s no easy answer to this question.

“One outcome could be simply an agreement to freeze everything in place, where United can have 70-seaters and the Continental ones can’t. That’s a possibility,” added Hamlin. “It would surprise me if they don’t move in the direction of opening that size capacity in the former Continental system,” which, of course, could prove tremendously valuable to a regional given the proportion of flying they now perform for their mainline partners even in point-to-point service.

Whatever strategy it eventually formulates for its various regional partners, United said it expects the merger to deliver $1.0 billion to $1.2 billion in net annual “synergies” by 2013, including between $800 million and $900 million of incremental annual revenues, in large part from expanded customer options resulting from the greater scope and scale of the network, and additional international service facilitated by the broader network of the combined carrier. The combined company also expects to realize between $200 million and $300 million of net cost “synergies” by 2013.

What those synergies mean to passengers might depend on which hub they use, and much will depend on which cities the combined airline deems most valuable. Some might see some slight decline in frequencies on some routes, while others might see an increase, but because few of the airline’s routes overlap, the changes could prove subtle. Frequent fliers used to accumulating miles on either airline will feel no effect whatsoever, as both airlines now belong to the Star Alliance.