Cleveland Hopkins International Airport Preliminary Merger Analysis

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1 City of Cleveland Frank G. Jackson, Mayor Operational Issues Cleveland Hopkins International Airport Preliminary Merger Analysis As of today, Continental and United have not even admitted that they are discussing a merger between them, much less having announced an actual transaction. Potential Continental-United (CO-UA) merger discussions were held once before, during the first half of No definitive merger agreement was reached then due to United s financial condition at that time as well as the unprecedented increase in fuel prices in A CO-UA merger would create the largest airline in the world measured by total annual revenues in 2009, surpassing by a small amount the new Delta created from its merger with Northwest. Continental + United Delta + Northwest $28.9 Billion $28.1 Billion A CO-UA merger would combine CLE s largest (CO) and third-largest (UA) carriers in terms of passengers, based on CY 2009 CLE airport data, although if Delta and Northwest had been operating together at that time, UA would have been ranked #4. A merger would increase CO s dominance at CLE only slightly. Continental 65.2% Southwest 10.5% Delta + Northwest 8.0% United 5.4% A merged CO-UA would have eight domestic hubs three former Continental (CO) hubs in Cleveland (CLE), Newark (EWR) and Houston (IAH) plus five former United (UA) hubs in Denver (DEN), Washington (IAD), Los Angeles (LAX), Chicago (ORD) and San Francisco (SFO). There would also be CO s smaller Micronesian hub in Guam (GUM). A CO-UA merger would be made easier because: (1) both airlines are in the Star Alliance, the largest of the three global airline alliances; (2) both airlines participate in an antitrust-immunized Transatlantic joint venture with Lufthansa and Air Canada; (3) both airlines already code-share on most of each other s worldwide services; (4) both airlines have been bringing their on-board services more closely aligned; and (5) both airlines have been co-locating their gates at many major airports around the world, including at CLE. An Equal Opportunity Employer

2 The CLE hub would be the smallest of the eight hubs operated by the merged carrier in terms of domestic mainline (non-regional/commuter) flights operated and onboard passengers carried during the year ended September 30, Hub Flights Passengers ORD 158,961 18,743,644 IAH 158,883 19,748,076 DEN 130,549 16,657,208 EWR 105,424 12,571,745 SFO 87,207 11,545,877 LAX 66,572 9,238,660 IAD 48,954 6,364,142 CLE 28,667 3,168,232 A CO-UA merger would be a so-called end-to-end merger with few overlapping domestic routes, most of which would be hub-to-hub routes (such as the three CLE routes to DEN, IAD and ORD). There are no overlapping international routes. A CO-UA merger would provide added strength to the combined airline both domestically and internationally, as Continental is strong where United is weaker (such as in the Northeast U.S. and in Latin America) and United is strong where Continental is weaker (such as in the Western U.S. and in Australasia). A CO-UA merger would make the combined carrier the largest U.S. airline to Asia, the second largest to Europe (after Delta) and the second largest to Latin America (after American). CLE would be the only one of the merged carrier s eight hubs that does not currently have long-haul nonstop intercontinental service. But a CO-UA merger could lead to the resumption of CLE-Europe nonstop service, most likely in the CLE-FRA market and operated by either the merged carrier or Lufthansa. And although it is a longer-term prospect, a CO-UA merger could also lead to the start of CLE-Asia nonstop service, most likely in the CLE-NRT market and operated by either the merged carrier or All Nippon. If a CO-UA merger transaction is announced, it is almost a certainty that the announcement would state that none of the eight existing domestic hubs would be closed or even materially reduced. This would provide the carriers with a better public perception of the potential merger, as well as more procedural support from the hubs and major cities on each carrier s existing network. But as can be seen using CVG as an example, once a potential merger is approved, the merged carrier s real plans become more apparent. The main operating issue facing CLE in a CO-UA merger is the fact that it lies within a triangle bounded by larger CO/UA hubs in EWR, IAD and ORD, and most of the cities currently connected to CO s CLE hub are also connected at An Equal Opportunity Employer 2

3 least two (and in most cases, all three) of these other hubs. But of the three larger hubs, only IAD has significant airfield and terminal expansion capabilities, ORD considerably less so, and EWR virtually none. So CLE s uncongested facilities would continue to offer the merged carrier substantial benefits in connecting cities in the CLE hub catchment area to markets throughout the merged carrier s expanded global network. That said, the real issue surrounding the CLE hub (or any hub, for that matter) is profitability. If the CLE hub can be operated profitably by a merged CO/UA, then it will very likely continue to exist. But if that is not the case, then operations at the CLE hub could be reduced, perhaps as far as becoming merely another spoke city in the merged carrier s network. In a worst-case scenario where the merged carrier eliminates the CLE hub, service would almost certainly be replaced, at least in part, by other legacy carriers improving service to their own hubs as well as low-fare carriers expanding their service in many medium- and large-sized markets. This certainly will not replace the breadth of service offered by the hub, but it has the potential to actually improve service levels in many larger markets where mainline aircraft would replace regional jets (the Miami market could potentially be a good example of this type of action as American might add mainline service to its hub there in place of CO s regional jet service in the market. Governmental and Other Approval Issues The U.S. Department of Justice (DOJ) is the lead agency and is responsible for antitrust analysis, review and approval, while the U.S. Department of Transportation is responsible for analyzing, reviewing and approving international route authority transfers. The DOJ review process and timelines are as follows: Merging parties file with DOJ and FTC Preliminary review: does the proposed transaction raise competitive concerns? Yes DOJ opens preliminary investigation (PI) DOJ conducts PI, analyzes results DOJ issues second request for information and civil investigative demands to other parties DOJ reviews additional information Transaction problematic No; transaction approved No competitive concerns; transaction approved Third parties provide information to DOJ No competitive concerns; transaction approved 30 days 20 days DOJ files injunction to block DOJ and parties settle on remedies; DOJ files injunction and consent decree An Equal Opportunity Employer 3

4 Beyond the U.S. government review discussed above, there are other issues that a potential CO/UA merger will need to take into consideration. First, there is one other regulatory review that will occur, that being in the European Union given the scope of operations that both carriers currently have in the E.U., notwithstanding the fact that there are no overlapping U.S.-Europe nonstop routes at issue. That said, the E.U. did not object to the recent Delta-Northwest merger, where Delta had a larger individual U.S.-Europe operation that either Continental or United while Northwest had a much smaller operation that either of those two carriers. Second, the biggest non-regulatory issue is likely to involve the unions currently on the property at Continental and United (and in some cases, at both carriers). It is often quite difficult to merge union workforces at combining companies, especially if the workers in the same job classification belong to different unions. But in this case, it does appear that union relations between the two carrier s work groups are civil and respectful. Third, before the airlines could operate a combined operation, the two carriers would need to receive the FAA s approval to combine the previously separate operating certificates of Continental and United into one certificate in the name of the surviving carrier. Additionally, operating, dispatch and maintenance computer systems, manuals and procedures will need to be standardized across the combined aircraft fleets and flying operations. It s difficult to say how long this would take a merged CO/UA to accomplish, but according to news reports, it took Delta and Northwest between 18 and 24 months to combine their operations, and they even started before they received all of the necessary merger approvals. Fourth, the airlines would need to consolidate all headquarters and back-office functions. This includes staffing (from executives all the way down to secretaries), finance and accounting, planning and human resources, to mention just a few areas. It also includes internal computer systems for financial and passenger reporting, as well as reservations computer systems that often also control passenger check-in and gate operations at every airport at which the two carriers operate. Fifth, the airlines would need to harmonize the public face of the merged carrier into one common brand. This would involve, among other things, repainting at least one (and perhaps both) of the pre-merger aircraft fleets, producing a joint website, adopting common logos, common signage, common uniforms, common advertising and even common letterhead. As to a timeline for all of these events to occur, it is difficult to say at this time given the very limited information that is publicly available right now regarding a possible CO-UA merger, or even if such a merger will take place at all. Still, taking all of the above issues into account (as well as other areas not discussed), under ideal circumstances Continental and United would probably need a minimum of between two and three years to fully combine all aspects of their two previously independent airlines into one merged carrier, complete with all of the necessary merged branding. But if a potential merger between the two carriers An Equal Opportunity Employer 4

5 progresses in a less-than-ideal manner, the combination could take much longer to be completed. You only need to look at the US Airways-America West merger to see that they are not yet completely combined even after five years. Map Continental s current service at its CLE hub is shown below (based on April 2010 schedules). Prepared By: InterVISTAS-ga 2 Consulting, Inc. An Equal Opportunity Employer 5

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