Don’t mess with Texas: Why Continental Airlines couldn’t refuse a merger with United Airlines

Many people believe United Airlines initiated merger discussions with US Airways solely to lure Continental into merger discussions as they were really United’s true partner of choice all along.  If United indeed had this ulterior motive, it was a very clever ploy knowing Continental could not stand idly by.

If the airlines had their way, all three U.S. based Star Alliance airlines would combine, but they know Federal regulators would never approve such a mammoth transaction and would view an airline of that size and scope as a threat to competition.

Continental might have been just as happy to remain independent, but with a three way merger not possible, it could not afford to allow United to merge with US Airways.  The problem for Continental may be summed up in one word: Texas.  If Delta/Northwest and United/US Airways merge, the only major remaining player is American Airlines and American is the one airline that cannot combine with Continental because of Texas.  American and Continental are both headquartered in Texas and both operate enormous hubs at their home airports in Dallas-Fort Worth and Houston Intercontinental respectively.

Regulators and local communities would surely block the creation of any airline that would try to dominate the state.  If such a merger was granted, the combined airline would surely have to relinquish one of those hubs and disbanding a Texas hub would greatly devalue and defeat the purpose of the deal.  Additionally, vacating one Texas hub, which would most certainly be Houston, would open the door for other airlines to enter that airport and capture the traffic left behind.

For this reason Continental was forced to pursue a relationship with United which is much more likely to be approved because there are few overlapping routes between those airlines.  Meanwhile, US Airways could combine with American Airlines without arousing similar anti-competitive accusations.

Of course United/Continental Airlines may yet combine with US Airways…a few years down the road if US Airways is still looking for a dance partner and particularly if the two airlines have continued to shrink in the interim as a result of higher oil prices, increased competition from low cost carriers, or the onset of another economic downturn.