Could Cleveland Suffer in a Continental-United Merger?

The airline industry is ripe for consolidation, and one possible scenario has Continental Airlines merging with United Airlines.

At least that's the public speculation.

But does it make sense? And if it comes to pass, what would become of Continental's hub in Cleveland?

A merger between Continental and United "makes as much sense as any and more than most," says Michael Roach, an industry analyst and former founding president of America West Airlines.

It's a generally held belief, Roach said, that there are too many so-called legacy airlines still in business and that they're operating too many hubs. Legacy airlines are the large carriers that essentially predate deregulation and include Continental, United, U.S. Airways, American Airlines, Northwest Airlines and Delta Air Lines.

A merger involving Continental makes sense, in part, because other combinations don't, Roach said. United and American won't fly because both are too big and have the only meaningful presence in Chicago.

And Northwest-United doesn't make sense because of their overlapping Pacific routes.

On the other hand, Continental and United appear to complement each other well from a route standpoint. Continental is strong in the South and into Latin America, while United has a powerful presence in the West and throughout Asia.

Neither Continental nor United would comment on the speculation. "We have repeatedly said that our preference is to grow alone and avoid some of the challenges of merging with other carriers," Continental spokeswoman Mary Clark said.

Still, talk of a Continental-United merger has "been kind of out there," said Helane Becker, an analyst with the Benchmark Co. in New York City, in part because United chairman Glenn Tilton has made it no secret that he believes the industry needs to consolidate.

So might the two airlines be discussing such a move now?

"I wouldn't be surprised," Becker said, "but I have no knowledge that they're talking."

One complicating factor is Continental's relationship with Northwest. Northwest owns a so-called golden share of preferred stock in Continental that would allow Northwest to block a merger involving Continental, Becker said.

But Northwest could be given concessions in exchange for its approval, analysts said.

What about Delta and United?

Becker believes the most likely merger scenario among the legacy carriers involves Delta because it's still in bankruptcy, and a company in bankruptcy has the flexibility to reject contracts to bolster finances.

Continental and Delta talked at one time when Continental was under different management, Becker said, but the two sides couldn't decide who would run the combined company. Delta's current chief executive is Gerald Grinstein, 73, who is not expected to fight a merger to protect his job.

Continental and United also spoke when United was still in bankruptcy (it emerged in February), but the result then was the same, Becker said.

But one analyst who thinks a Continental-United marriage doesn't make sense is Robert Mann of R.W. Mann & Co. of Port Washington, N.Y.

Labor strife could scare off financing

The two airlines would have all sorts of obstacles to overcome. For one, United has an older work force, from pilots to mechanics, and they would claim seniority over Continental employees even though Continental would most likely be the acquiring company.

The potential for labor strife might scare off the necessary financing for such a merger or make it too expensive, Mann said. He believes mergers involving Delta or Northwest, which also is in bankruptcy, are the most likely.

Any merger scenario involving Continental would create anxiety in Cleveland, where the airline's hub at Cleveland Hopkins International Airport employs more than 3,000 people, including about 1,000 working for ExpressJet, the airline that provides regional service under Continental Express.

In a Continental-United scenario, "Cleveland might well be a loser in the transition," Roach said, because United's Chicago hub and Continental's Newark, N.J., hub would certainly survive. But whatever scaling back that occurs in Cleveland would undoubtedly prompt others such as Southwest Airlines to fill the void.

Continental has it good in Cleveland

When United greatly reduced its extensive operations in Cleveland in the mid-1980s, service suffered for a while, said Dennis Eckart, former U.S. representative and former head of the old Greater Cleveland Growth Association. But Continental eventually filled the void and has a greater presence at Hopkins than United ever did.

But Mann is not so sure Hopkins would lose its hub because United has no room to grow in Chicago and Continental has a good situation in Cleveland. The loser could be United's hub in Denver, where competitive pressure is being applied by Southwest and Frontier Airlines.

Meanwhile, a Continental merger with Delta would leave two hubs in Ohio, one each in Cleveland and Cincinnati. Roach isn't sure which would survive. But if Continental were to merge with Northwest, Northwest's Detroit hub would likely drive Cleveland out of the hub business.

Tom Waltermire, chief executive of Team NEO, a regional economic development organization, said he has not heard any speculation about Continental and United, but that keeping the Continental hub at Hopkins remains a goal.

"All these guys are trying to get their costs down," he said. But, "consolidation that adds more complexity is not necessarily a virtue."

The more successful airlines seem to be those with the simpler business models, he said, such as Southwest, which flies Boeing 737s only.

Ricky Smith, director of the Cleveland Airport System, also said he has not heard any rumors related to a Continental merger and that such talk is not unusual among the airlines.

He declined to speculate on how Hopkins could be affected by such a scenario, although he added that Cleveland is a large market that relies more heavily on flights that begin and end here, as opposed to flights where passengers simply land in Cleveland to make a connection. That means if Continental's hub went away, other airlines would step in to provide service.

In the end, it might not be synergies or geography or anything operational that determines which hub stays and which hub goes. The fallout could simply depend on who is doing the acquiring.

"That as much as anything else dictates what lives and what dies," Mann said.

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