Why Southwest, AirTran and Frontier are different from United/Continental

by Charlie Leocha on June 1, 2010

At last week’s Senate Judiciary Committee hearing regarding the pending merger of United Airlines with Continental Airlines, Glenn Tilton, CEO of United Airlines made an impassioned and animated presentation arguing that his airline and Continental are fundamentally different creatures than low cost carriers.

His point is a strong argument against further consolidation of network carriers.

Mr. Tilton argued that this situation could be best exemplified in the Milwaukee market where United competes with Southwest, AirTran and Frontier. There, the three low cost carriers compete for a different passenger than United. They are looking for the point-to-point passengers. United is angling for the connecting passenger through their Chicago hub, be it to another smaller spoke city or to an international destination.

In other words, Tilton doesn’t see United competing with low cost carriers on their published routes. He competes with them where they don’t fly — to smaller cities and internationally. The magic word in Tilton’s lexicon is “connecting.” Therefore, United and Continental have fundamentally different businesses than the low cost carriers.

My jaw dropped. With that line of reasoning, all of the United/Continental talk about price discipline being exerted on the major hub-and-spoke airlines by the low cost airlines goes out the proverbial window.

The cat it out of the bag. With different business models, there really isn’t all that much direct competition, though it looks that way.

The chart at the top of this post tells an important story. The combined Continental/United airline would serve 108 small communities, while the four largest low cost carriers combined, only serve 21 small communities.

This is where airline competition will fail should this merger be approved. It is this small community service that suffers, especially when both Continental and Unites serve the same small cities and towns.

Effectively, there is no competition from low cost carriers on these routes.

The other area where the competition model fails is when considering international flights. With the DOT-approved development of three major international alliances, competition across the Atlantic has been damaged. If that closed system is combined with a Continental/United merger, where the connecting flights are subsidized by the international revenues, competition is again thwarted.

We are reaching a tipping point in terms of competition for small communities and for international destinations. While it is true that low cost carriers can provide cost pressures on routes where they directly compete, connecting traffic is not similarly constrained.

The Department of Justice (DOJ) should take a close look at the realities of true competition before blithely accepting Continental and United arguments that low cost carriers provide plenty of pricing pressure.

Even United Airlines’ CEO admits that he sees the world differently in Milwaukee than he sees it in Chicago, San Francisco, New York or Houston. DOJ should listen.

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  • Jeff L

    There’s another subtext here. One of the reasons the LCCs do better in general than some of the legacies is that they don’t serve these smaller communities, focusing on cherry picking profitable routes. I.E. these routes do not make money.

    Now, I understand the need to service the smaller communities, but it also has to make fiscal sense for an airline to do so. The entire ‘pricing pressure’ argument ignores the fact the the entire industry is operating under an unsustainable pricing model. The bigger danger to extended airline coverage is in fact the LCCs who maintain artificially low prices by focusing on the most competitive routes.

    If you want to really fix pricing (and watch everyone scream), here’s how you do it. Set a national economy per seat mile minimum ($.20 would be a nice margin), plus a per flight charge (around $100) and make every carrier use it for every domestic flight, and then compete on service and other fees. Totally transparent pricing based on miles traveled (shortest possible route).

    Yes, it will cost $1200 to go from PHL to San Diego. Because it should.

  • John Baker

    Charlie … Check my math. By this chart, there are only 9 small communities in the US where United and Continental overlap (75 UA + 36 CO => 102 combined vs 111 served by the two independently).

    So based on your logic, the merger should be disallowed due to the 9 communities where they overlap?
    How about the 66 communites that CO passengers can now reach that they couldn’t before?

    I would think the stronger argument is the 83 large cites where the two overlap (93 CO + 93 UA => 103 combined vs 186 independently). That will have to effect pricing in those cites.

  • MVFlyer

    My guess is that these small communities pay significantly more for their flight city pairs than the big city to big city pairs, where there’s more competition from LCCs. But the LCCs won’t touch the small communities because they don’t generate enough point to point traffic. This was the entire idea behind regulation–incentivizing the airlines to fly point to point between small communities (and large). Now I’m not at all suggesting we bring back regulation, but in a sense UA and CO are right. The overwhelming majority of traffic is generated from large cities, not small towns, so overall, for most of the people, UA and CO do get price pressure from the LCCs (at the expense of the small towns).

  • Juan from CHI

    How many of these 102 “small” markets currently have service by both UA and CO? Those are the only markets that would lose any competition. All those small towns in TX that are served by CO and not by UA would not be losing/gaining anything but new signage. That also goes for all the small towns out west served by UA but not by CO. The airlines don’t gain much if any new pricing power over them.

    I don’t buy the international argument either. Their are very few cities that you can’t connect to at least 2 of the 3 global alliances. If you are going to Europe you can select Dulles, O’Hare, Philly, JFK, Boston, Atlanta. Th 3 alliances are competing against each other. All 3 will compete for Latin and South America and United and Delta will compete for Asia.

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