Merger raises stakes for Delta, shrinks industry

And the deal could spark even more consolidation among the top U.S. airlines with international operations, which will have shrunk from six to four if United and Continental close their deal. Speculation already circulated Monday about whether the two "unmarried" carriers, American and US Airways, will be prodded into a courtship.

Such a wave of mergers could condense the traditional hub-and-spoke airlines into three giants -- a scenario long touted by analysts and executives as better for the industry's perennially battered bottom line, but one viewed with concern by consumer advocates who fear higher fares in the long run.

United would be the surviving brand in the Continental merger, although, in an odd twist, the carriers said Monday they'd use Continental's logo and aircraft paint scheme. At the helm would be Continental Chief Executive Jeff Smisek.

"We are going to provide the best scope and scale, the best network and the best product in the industry," Smisek said in a conference call Monday.

Delta had no direct public comment, though chief executive Richard Anderson has said that "nothing concerns us" about further industry consolidation.

"Delta has always been and will continue to be a strong competitor in the industry," Delta spokeswoman Betsy Talton said Monday.

United and Continental will create an  airline "big enough to compete very well with Delta," said airline expert Darryl Jenkins.??? "What you have now is another airline the size of Delta with as good a management as Delta."

Continental, based in Houston, is known for a relatively better finances and in-flight perks that weren't cut as much as at some carriers in recent years. United, based in Chicago, is among the world's most recognized brands and has a stronger Asian network than Delta, while Continental is stronger in central and South America.

"Today [Delta is] far and away the biggest combination, and once Continental and United fully deploy a global network, they would essentially be neck-and-neck with Delta," said airline consultant Robert W. Mann.

Even after absorbing Northwest's Asian operations, Delta sought last year to strengthen its presence in Asia by pursuing a partnership with Japan Airlines. But the Japanese carrier chose to stay with marketing partner American Airlines.

Now, Delta will work with its SkyTeam alliance partners to "kind of flank or compete" with United and its Star Alliance, Mann said. In those alliances, U.S. carriers jointly sell seats with foreign carriers.

Domestically, United and Continental are minor players at Hartsfield-Jackson International Airport, so the effect of their merger would be muted for local fliers. But it would create a potentially tougher rival for Delta in big non-hub markets such as New York and Los Angeles, as well as in smaller markets where business fliers must choose among connecting flights.

With Continental's hub in Newark, a combined United-Continental would be a potent force in New York -- a key focus for Delta -- as well as in Chicago, Los Angeles, Washington and Houston, where the two carriers have hubs or significant operations.

Most of Delta's hubs are in smaller cities, including Minneapolis, Memphis, Detroit, Salt Lake City and Cincinnati, in addition to Atlanta.

"It's not the biggest airline in the biggest U.S. cities," Seth Kaplan, managing editor of Airline Weekly, said of Delta. While hubs are designed for flight connections, because Delta's hub cities have smaller populations, there's a smaller pool of potential customers to pay a premium for nonstop flights, Kaplan said.

The recession put a dent in Delta's hopes of using the Northwest merger to win more corporate travel contracts. As the economy picks up it could be contending with a  stronger competitor, Mann said.

"Continental has done very well on the corporate contract side" because of their service, he said. Merged into United, he said,  "they'll be a formidable competitor."

During Monday's conference call Smisek said, "I have been keeping my eye on Delta they are a serious competitor for us in New York and Latin America."

Analysts and some airline executives have long advocated consolidation as a way to stabilize the industry and shore up the big players' bottom lines and boost pricing power -- the ability to keep prices above certain levels without losing customers. Historically that's been tough to do with five or more major traditional airlines, along with several prominent low-cost carriers, such as Southwest Airlines and AirTran, and numerous smaller carriers.

For consumers, increased airline pricing power translates to higher fares, one of the potential disadvantages of mergers that cut the number of major players.

The Department of Justice will review the United-Continental deal, which the companies hope to close by year's end. The agency signed off on both the Delta-Northwest merger and a 2005 merger of US Airways and America West. United and Continental also will have to negotiate union integration, another potential snag.

Prior to this decade, speculation about various deals sloshed periodically around the industry, to little effect. The financial crisis that followed 9/11 -- with Delta, US Airways, United and Northwest all undergoing Chapter 11 bankruptcy restructurings -- brought new energy to the deal-making.

Though the worst of the financial crisis has passed, most of the big carriers remain in wobbly financial shape amid volatile fuel costs and slumping demand. United's parent lost $651 million last year while Continental lost $282 million.

Delta, too, lost money last year but now enjoys the lowest operating costs of the major U.S. network carriers, due to the fact both Delta and Northwest shed major costs via their bankruptcies, according to Kaplan.

Airline analyst Vaughn Cordle on Monday issued a report saying more airline mergers are needed, arguing the U.S. industry can only support three large hub-and-spoke airlines.

Mergers could even spill into the ranks of the discount carriers, with both Southwest and AirTran saying they are open to acquisition scenarios though they are in no active talks. AirTran chief executive Bob Fornaro has said he views mergers among larger carriers as a potential chance to add presence in any markets where regulators make the merging carriers shed routes or airport gates. It's unclear if any such opportunities would arise in the United-Continental deal.