United-Continental Merger: Airlines Still A 'Gruesome' Business

It costs tons of money just to keep an airline going, and even more to make it grow. Meanwhile, customers are always ready to bolt if they can save a few bucks with some other airline. A few years back, Warren Buffett called the economics of the industry "gruesome."

The Continental-United merger may make things slightly less gruesome for the companies. But the picture will still be pretty ugly.

Continental lost $282 million last year, and United lost $651 million, the AP notes. Both airlines are "legacy carriers" — big airlines that have been around since before the industry was deregulated in 1978, and that still tend to have higher operating costs than their newer, cheaper competitors.

And while the recession has certainly been hard on the legacy bunch, their problems run much deeper than the latest downturn. Between them, United and Continental have filed for bankruptcy three times in the past 30 years: Continental went into bankruptcy once in 1983 and again in 1990; United entered bankruptcy in 2002, and didn't emerge until 2006.

The five big legacy carriers — Delta, United, American, Continental and US Airways — lost $29 billion over the past five years, the WSJ's airline columnist noted recently. "The economic rebound surely will help, but they can't keep flying if they make a little bit in the good times and lose a lot in the downturns," he wrote.

The Continental-United merger would create the country's biggest airline, with a market share of about 20%. The combined airline (which would have to be approved by federal regulators) would be able to raise fares for some routes — particularly those where there isn't much competition from low-cost airlines like Southwest. It would also allow the companies to cut some jobs. But it's not clear that the combined airline (which would be known as United) would be consistently profitable.

For the moment, the nation's largest airline is Delta, whose 2008 merger with Northwest came with the typical promise of cost savings and revenue growth. Delta lost $256 million in the first three months of this year, but may turn a profit this quarter.

This post was updated on May 3 after the merger was announced.




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