Continental/United merger approved by DoJ

In a move that was only surprising for how quickly it happened, the Department of Justice has stated that they are satisfied with the terms of the proposed merger between Continental and United Airlines. The new carrier will be the largest and there was some concern that various regulatory agencies would place undue barriers in the place of the merger. Given the conditions that the DoJ assigned, however, that seems to have been false fear.

The only significant condition that the DoJ applied was that a number of slots – amounting to 18 daily round trip flights – be ceded to another carrier in the Newark market. That number roughly represents the number of flights that United operates from Newark today. Given the relative domination of the Newark market by Continental today (64% of enplanements are on Continental or Continental Express), this requirement does not seem unreasonable. While Cleveland and Houston both have a higher percentage of service operated by Continental, the New York City market is apparently in greater need of competition. Plus there is the fact that Newark is slot-restricted while the other airports are not.

Those slots will be granted to a new entrant in the Newark market: Southwest Airlines. The carrier will be leasing the slots from the combined United/Continental and is expected to begin operations in March 2011. The full complement of slots will be transferred by June 2011. They have not yet announced destinations for the 18 daily flights.

Unlike the recently proposed Delta/US Airways slot swap, the Continental/Southwest deal was welcomed by the DoJ. It seems to reason that having a significant number of slots go to a single stakeholder, particularly a new entrant, is a better competitive solution than spreading a limited number of slots across a broad collection of carriers, effectively limiting any one of them from providing significant service and competition.

With this approval the number of potential road blocks for the proposed merger diminishes quite significantly. There are still potential union issues and the Department of Transportation will eventually need to rule on a combined operating certificate. And there is the pesky little issue of the stockholders needing to approve the merger, but that seems quite likely given the large number of institutional shareholders. At this point things appear to be progressing rapidly towards this deal being done somewhere around Halloween, if not sooner.

Speaking of the union issues, it is no real surprise that the pilots’ unions have brought up the scope clause in their initial negotiations with the companies. What is somewhat surprising is just how aggressive they are being with their stance. Currently the United and Continental pilots have differing scope clauses for their operations. With United the limit for regional operations permits the operation of 70 seat aircraft by regional partners, Continental has a more restrictive 59 seat limit in the agreement with its pilots. The initial stance of the combined union is that there should be zero flights operated by regional carriers. Yeah, a bit extreme. They’ve made it clear from the initial announcement that they’re looking to be as restrictive as possible on this and the initial position is not too surprising as a jumping off point for the negotiations. Still, it is a bit unreasonable to expect that will actually be the ultimate agreement.