United-Continental merger points to uncertain future

Posted: May 3, 2010 in Economics
Tags: ,

United and Continental airlines announced a merger today.  The details are not that important.  What is important is the contraction in the industry.  This is only the first wave and other large, long distance carriers are likely to follow suit as the costs of operating an airline continue to escalate.

The costs airlines grapple with are labor, equipment and fuel.  Of the three you can’t get much protection from the escalating cost of jet fuel, though you can make binding contracts for labor and financing for equipment purchases.

As the economy improves we should expect the cost of liquid fuels to increase.  Last week I was in San Francisco where regular gas was selling north of three dollars, well above the low two-dollar prices we saw at the bottom of the recession.  It’s a good news/bad news situation fuel is cheap when we don’t need it and costly when we do.  This roller coaster will likely continue and might be the culprit if we head into a double dip recession.

The solutions are multiple but one that every company will reflexively consider is driving less and, in general, taking costly energy out of as many business processes as possible.  Where you might fly today, you will learn to use web meetings, web conferences and an assortment of video and VoIP.  It’s a new era and United-Continental is just the first shot.

The only question in my mind right now is this:  Does the combination of these two airlines mean United will be only half as bad or will Continental be doubly worse?

So, what did you think?

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