Business

Airline CEOs: Merger won't raise prices

Tuesday, August 31, 2010
United and Continental airlines

The chief executive officers of United and Continental airlines told a federal judge in San Francisco today that a merger would enable their companies to compete and survive better against "brutal" industry competition.

But CEOs Glenn Tilton of United and Jeff Smisek of Continental denied that the merger would raise prices and said it wouldn't necessarily reduce service.

"I believe that consolidation would reduce the financial risk. I was trying to improve the balance sheet," said Glenn Tilton, chief executive officer of Chicago-based United Airlines.

But Tilton testified it was "absolutely not" true that he believed the merger would result in increased prices.

The two chief executives were the first witnesses in a hearing before U.S. District Judge Richard Seeborg on an antitrust lawsuit in which 49 passengers are seeking a preliminary injunction blocking the merger. The passengers claim the merger would reduce competition and lead to increased costs and decreased service.

The proposed merger was announced on May 3. It would combine Chicago-based United and Houston-based Continental, now the nation's third and fourth largest carriers, to create the world's biggest airline in terms of revenue-producing miles.

The merger passed an important hurdle on Friday when the U.S. Justice Department announced it was closing an antitrust investigation after finding no problems with the plan.

But Seeborg noted at the start of today's hearing that he is not bound by the Justice Department's conclusion, although he said he might take it into consideration.

Tilton was questioned during his hour-long testimony by Joseph M. Alioto, a lawyer for the passengers, about an e-mail he received from a consultant who predicted the merger would increase pricing power, among other results. Tilton acknowledged receiving the e-mail and responding with the words "Straight ahead," but said his comment applied to other parts of the message and that he did not agree that the merger would increase pricing power or prices. "I believe low-cost carriers set the price. When we try to raise prices, Southwest Airlines doesn't follow us and the prices collapse," he testified.

The hearing will continue Wednesday and, if necessary, on Friday with testimony from United Senior Vice President Kevin Knight and several industry experts.

Seeborg will rule on the injunction request sometime after receiving final briefs on Sept. l0.

If Seeborg does not grant an injunction, the merger must still be approved by shareholders of the two airlines in votes on Sept. 17 and survive additional antitrust probes by several state attorneys general.

Smisek was the first witness on the stand and testified for several hours.

He told Seeborg competition in the industry is "brutal" and said the two companies would be able to compete more effectively if allowed to merge.

"We would have a broader network and be more attractive to travelers," Smisek said.

He said airline competition is intense both because of challenges from low-cost carriers such as Southwest and because consumers can compare prices via the Internet.

"Consumers are very cost-sensitive. We don't have the ability to raise prices. The market raises the price," Smisek testified.

He said he expected the merger to enable the new company to provide smoother connections and attract more business travelers, whom he described as "higher-yield customers."

Alioto showed Smisek a chart prepared internally by Continental analysts earlier this year to show the possible effect of the merger on a process called "optimization," or efficiency in the planning of schedules, routes and aircraft use.

Smisek acknowledged the chart showed a possible 12 percent reduction in flights by the two airlines from San Francisco, 10 percent from Chicago, and 84 percent from Cleveland, the city that would be hardest hit by the merger.

But Smisek insisted those figures were tentative, that optimization would require more research, and that no decision had been made on reducing service.

"I don't know what we're going to do because we haven't done the optimization yet," Smisek said repeatedly.

Alioto told Seeborg during his opening statement, "If one person pays 10 cents more on a ticket because of the merger, that's just as much stealing as a billion dollars."

Katherine Forrest, a lawyer for the airlines, countered in her opening, "The evidence is that consumer choice is going to dramatically increase as a result of this merger."

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