US airline merger shows business is tough in the sky (Feature)

By Daniel Schnettler and Steffen Weyer May 3, 2010, 21:41 GMT

Houston/Chicago - Aviation is a tough business. From Central Europe, if you're lucky, you can fly to the Mediterranean for 19.99 euros (26 dollars), and in the low season you can make it to New York for 199 euros.

It's no wonder that many airlines have been posting losses for years. During the global economic crisis, the wealthy business flyers stayed away, and rising fuel prices made matters even worse. Mergers seem like a last-resort option.

The merger announcement Monday of Continental Airlines Inc and United Airlines brings together two of the sector's greats to form the world's largest airline.

Jeff Smisek, 55, Continental's current chairman and the man who is set to become chief executive officer of the new company, said Monday that the merger is the best way to deal with tough competition.

Just how dramatic the situation is in the aviation sector became apparent in January, when Japan Airlines Corp (JAL) filed for bankruptcy protection. Drastic cuts, including one-third of the airline's 50,000 jobs, were necessary in order to save the company.

Greece's Olympic Airlines suffered a similar process in 2009. The company only lives on in a smaller form, as Olympic Air. The legendary Swissair already collapsed years ago, with what was left of it flying on under the Lufthansa company umbrella.

Experts think the problem lies in the sector's fragmentation. At the beginning of the aviation era, every country - even small ones - set up its own airline. If a company could not survive on its own, it secured plenty of tax money.

That is why analysts cheer over mergers.

The new United Continental Holdings plans to attract more passengers by consolidating routes. At the same time, it is to save duplication in administration, technical and marketing.

Continental is strong where United is weak. And United is strong where Continental is weak, Smisek noted.

Yet it remains to be seen whether the merger will work. Both airlines have recently posted losses, even though their situation is not quite as bad as it used to be over the past few years. Continental makes its money mostly in long-distance flights to Europe and Latin America, while United focuses more on the Asia-Pacific routes.

Some competitors may cheer. Continental and United may scrap some flights where their networks overlap, which would in turn push up ticket prices for the remaining carriers.

The leadership of the new company has staunchly denied the possibility of price hikes. But both companies will, in the long run, have no choice if they want to make money, but to ask their clients to pay up.

The era of super-bargains may slowly be coming to an end.