GAO Analysis of United-Continental Merger Highlights Indirect Route Overlap

 - June 11, 2010, 8:06 AM
Both United and Continental hold orders for Boeing 787s. Continental recently announced plans to launch service from Houston to Auckland, New Zealand - a city United now serves from Los Angeles and San Francisco.

An analysis of the competitive effects of the proposed merger of Continental and United Airlines by the U.S. Government Accountability Office (GAO) shows that combining the airlines would eliminate one effective competitor (defined as providing at least 5 percent of traffic between airports) in 1,135 city pairs, affecting almost 35 million passengers. Conversely, the GAO found the merger would create a new competitor in only 173 markets, affecting some 9.5 million passengers. Although the GAO did note that in all but 10 of the airport pairs at least one other competitor exists, no one should doubt that the merger would mean less competition in many markets if new entrants don't fill the resulting void. 

Even though the two airlines claim that there is little direct overlap between their respective city pairs, the GAO notes considerable overlap exists between markets served by United out of Chicago and Continental out of Cleveland. For example, 52 out of 62 domestic airports served by Continental from Cleveland also get service from United from Chicago. 

Similarly, although the two airlines do not now compete directly on a city-to-city basis for any international destinations, the airlines “aggregate” traffic from many domestic locations at a hub airport where passengers transfer to international flights. For example, passengers travel from many locations across the U.S. to connect to Continental international flights from Newark, where Continental operates a large hub. Likewise, United aggregates domestic traffic at its Washington Dulles hub for many of its international flights. Therefore, a passenger from Nashville, for example, might fly to a given location in Europe through either of the hubs.

Some of the common international destinations United and Continental serve from their Newark and Washington Dulles hubs include Amsterdam, Brussels, Frankfurt, London, Montreal, Paris, Rome, São Paulo and Toronto. Similarly, both airlines also serve many of the same international destinations from United's hub in Chicago and Continental's hub in Houston. In total, they serve 30 common international destinations, representing 65 percent of their total international seat capacity.

Of course, none of these facts will escape the Department of Justice as it weighs the competitive implications of the proposed merger. The combination of United and Continental would create the largest airline in the world. One should expect nothing less than a thorough review, and a less straightforward path to approval than there might appear at first glance.