BA feels the heat as United and Continental form world's biggest airline

The pressure mounts on BA to finalise its own US tie-up, as the two US airlines seal their $3bn merger.

Last Updated: 31 Aug 2010

If the strikes and the ash cloud weren’t bad enough, this weekend brought more unwelcome news for BA: two of the US’s biggest airlines, Continental and United, have decided to merge in an all-share deal worth $3.2bn. With about a fifth of the US domestic market and a 7% share of the global market, the new super-airline will be the biggest in the world (leapfrogging Delta), and will apparently allow the two to save about £1bn in costs. So BA is now looking at a substantially beefed-up rival on transatlantic routes, which increases the pressure on it to push through its proposed merger with American. But the regulators may not be so amenable to that one…

The United-Continental deal comes as no great surprise: consolidation is the name of the game in the airline industry at the moment, after all the recent horrors, and this one’s been lined up for a while. Technically, it’s actually a takeover of Continental by the slightly bigger United: Continental boss Jeff Smisek will be chief exec, while United’s Glenn Tilton becomes non-exec chairman. Apparently Smisek floated the idea when he heard United was considering a tie-up with US Airways. ‘I didn’t want him to marry the ugly girl,’ he said, ‘I wanted him to marry the pretty one, and I am much the prettier.’ (Not very nice for US - and what does that make BA?)

The combined United would be a monster: it will fly to 370 destinations in 59 countries, and will have 86,000 staff, 693 planes, and annual revenues of about $29bn. More importantly, it will allow the two airlines (who are both currently loss-making, and have both spent their fair share of time in Chapter 11) to cut costs substantially. But although some are complaining that the merger will reduce competition, thus forcing prices skywards, apparently it’s unlikely to upset regulators too much because there’s not that much overlap between the two in terms of routes and hubs.

Unfortunately, the same can’t be said for BA and American, which have been talking about a tie-up for months now. BA has already entered into the spirit of consolidation by joining forces with Iberia here in Europe – but regulators are concerned that a combined BA/ Iberia/ American (or International, to use its incredibly anodyne new title) would have too much power over the all-important transatlantic routes. On the plus side, the United/ Continental tie-up would be a precedent in terms of scale. But BA may still struggle to find its own US link-up without some serious compromise on routes and landing slots.

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