CHICAGO — A marriage between Chicago-based United Airlines and Houston-based Continental Airlines may have a limited impact on their key airport facilities, as they operate mostly complementary routes, but it could add to the negative pressures posed by industry consolidation, market participants said yesterday.
The boards of both airlines on Sunday approved the merger that involves a share swap valued at $3 billion. If it clears regulatory and union hurdles, the new company United Continental Holdings Inc. would unseat Delta Air Lines as the largest carrier and have $29 billion in revenues based on last year’s results.
The firm would be based in Chicago and led by Continental’s chief executive officer, Jeffery Smisek. The merger is expected to trim costs by at least $1 billion by 2013. The two previously held unsuccessful merger talks in 2008.
The proposed union made sense from a route structure, it will have strong leadership, and should have a favorable impact on the airlines’ key facilities, said Thomas Spalding, portfolio manager at Nuveen Investments, based on a review by the firm’s analytic staff.
“It’s a stable credit impact on facilities,” Spalding said.
The airlines said it was too early to discuss the effect on its hubs, but said it was likely some overlapping positions would be cut at their current headquarters in Chicago and Houston.
While route overlap is limited, an eventual union between the two would still pose some credit risks to secondary airport hubs operated by the two and at airports where the two represent more than 30% of flights, according to Moody’s Investors Service.
Change, however, is at least a year off, as the merger faces U.S. Justice Department and union approval. Airlines then typically take months to implement changes to route structures.
“Consolidation of hubs has often been a key strategy in past mergers and the number of hubs currently operated by these two airlines make this a particularly acute issue if this transaction were to occur,” Moody’s wrote.
United operates its major hubs at Chicago’s O’Hare International Airport, where the airlines accounts for 48% of passengers, Denver International Airport, where it also accounts for 48% of travelers, Los Angeles International Airport, where it handles 15% of passengers, San Francisco International Airport, where it represents 44% of travelers, and Washington Dulles International Airport, where it handles 36% of passengers.
Continental operates hubs at Houston International Airport. where it represents 72% of passengers, Newark Liberty International Airport, where it represents 40% of passengers, and Cleveland Hopkins International Airport, where it represents 65% of passengers.
Overlap at the hubs and at most airports is minimal.
The airlines account for more than 30% of passenger travel at just 13 airports, including most of their hubs. “As a result, the direct credit impact from a United-Continental merger may not be as significant at many U.S. airports,” Moody’s wrote.
Standard & Poor’s agreed that the greatest risks are posed to the small to mid-sized hub airports, but cautioned that it is still early in the merger process to predict the effects.
“From an airport credit perspective, the bottom line is that you don’t really see the true impact until you begin consolidating and see where you get the best yields,” said analyst Kurt Forsgren.
A successful merger, however, would escalate the pressure on other carriers to consolidate in order to improve profitability and better compete.
Further consolidation “has the potential to reduce system-wide seat capacity and drive up airfares, leading to lower enplanement levels at many airports,” Moody’s warned.
Such results would hurt airports as they struggle with travel levels that have been flat or lower since 2008 and could begin to erode key sector-wide credit strengths such as debt-service coverage and liquidity.
Smaller airports, transfer hubs, and airports with a large proportion of business from only one or two airlines will be most vulnerable if the remaining U.S. legacy airlines continue to consolidate, Fitch Ratings warned in a report last week.
“Smaller airports, or those with high debt burdens, high connecting traffic, or elevated carrier concentration, will likely face more difficulty in responding to the repercussions of carrier mergers,” analyst wrote.
United emerged from a Chapter 11 filing in 2006.
In the bankruptcy, the airline challenged repayment of about $1.1 billion of its $1.6 billion of special facilities debt and was able to settle for reduced payments with bondholders on some of it. Denver refunded $270 million of United bonds in 2007.
The courts had ordered the airline to fully repay those bonds during its bankruptcy proceedings.
Continental has borrowed more than $1.5 billion of new money or refunding special facilities revenue bonds since 1998 in 10 issues for projects at various airports, according to Thomson Reuters.
