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Continental-United Merger May Be Necessary

Continental Airlines is considering merging with United Airlines to form a more profitable company. Since Continental is based in Houston, many are worried about the impact such a deal would have on the city. Bill Stamps reports — neither company may have many options.



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Last week a number of politicians, including Mayor Annise Parker, attended news conferences in which they expressed their concerns about a Continental-United merger, specifically, whether Continental’s headquarters would remain in Houston.

Rice business professors Scott Sonenshein and Gustavo Grullon say that probably won’t happen if the deal goes through. But both agree, the deal may be necessary for Continental’s survival. This is Professor Sonenshein.

“Air travel has been down. Business travel has been down. You know things are beginning to pick up, but airlines have historically tended to have too much capacity.”

Professor Grullon agrees and said the two airlines discussed a merger two years ago, but didn’t make the deal. But this time around, there other factors to consider.

“There have been big changes in oil prices that have affected the cost structure, so that could be one thing. The other thing I think is important is that this industry needs to consolidate, because as a whole this industry has been losing money for decades.”

Because of the financial losses, Grullon says the companies have to do something and for Continental and United the merger appears to make sense.

“There are two things that the industry can do. Basically let some companies die or on the other hand, start consolidating to start to save some of these companies. One thing that could happen is that one of the companies, for example, United may not be around in two or three years because they go into bankruptcy. So it isn’t clear what is better, to let one of the companies die or merge.

Professor Sonenshein says large mergers don’t always pan out the way the two parties hoped. Remember the Time-AOL debacle?

“There’s was probably a lot more skepticism of that deal than there would be of the Continental-United merger, but what they have in common is just kind of overly optimistic predictions that get put on paper. When you look at the financing, you put things together. You think you’re going to save more money than you’re actually probably going to be. You think you can put the two cultures together. You think you can adopt work rules together.”

The bottom line — according to Grullon — Continental may not have much a choice.

“They’re losing money, the industry is losing money and this could be the life preserver that keeps them afloat. Because if they don’t merge with United, United may merge with another company and then they end up in a worse situation than they are right now.”

He says the best indicator of whether the deal looks good is how the market reacts and stock rose for both companies after merger talks were announced.

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