United Airlines and Continental Airlines need to merge to be profitable in competing with low-cost and foreign carriers, executives of the two U.S. major airlines said on Thursday.
Today, international competitors have emerged and powerful new entrants have continued to gain ground, Glenn Tilton, chief executive of UAL Corp's United, said during a hearing of the U.S. Senate Commerce Committee.
The merged Continental/United will allow us, as a U.S. carrier, to compete effectively, Continental CEO Jeffery Smisek said, adding that the merger would make the combined airline more financially viable than either carrier alone.
The merger, announced last month, would create the world's largest airline by revenue and traffic, surpassing Delta Air Lines .
If the deal is approved by antitrust officials at the Justice Department, United/Continental -- operating as new United -- would join Delta and American Airlines, a unit of AMR Corp , as the three largest domestic U.S. carriers.
They would hold a combined 35 percent share of the market. New United would command about half of that.
Some senators strongly opposed the merger, saying it would hurt consumers and reduce competition. Congress cannot block the merger but can influence regulators and public opinion.
It was the second straight day of hearings for the two executives, who were grilled by the House of Representatives Transportation and Judiciary committee on Wednesday.
Both executives painted a picture of a brutal U.S. airline industry beset with competitors from around the world, forcing already razor-thin margins to be slashed and air fares to be pushed lower on an inflation-adjusted basis.
Tilton said the major U.S. airlines have been systematically incapable of turning even a modest profit.
Smisek said more than 85 percent of Continental's nonstop flights have competition from low-cost airlines, such as Southwest Airlines , which carries more passengers than any other airline in the United States.
We have low-cost competition in all of our hubs, as does United Airlines, Smisek, slated to be CEO of the merged company, told lawmakers. We have to compete against those lower costs.
'NOT IN GREAT SHAPE'
Last month, United and Continental announced they would merge in an all-stock deal worth $3.17 billion. The two airlines said they hope to achieve synergies of $1 billion to $1.2 billion, largely from new business.
Low-cost airlines, volatile fuel prices and slumping demand have hammered the U.S. aviation industry in the past decade, executives said during the two-hour hearing in Washington, which was also webcast.
We're not in great shape at Continental, Smisek said. We've lost a lot of money.
Tilton pointed to Republic Airways Holdings , a regional airline company that bought two carriers last year, as an example of one airline that has boosted its presence in some already competitive markets, such as Milwaukee.
An analyst on the panel, Daniel McKenzie of Hudson Securities, said Southwest was in the midst of a transformation that would allow it to enter smaller markets that are typically the province of major airlines and their regional affiliates.
If we're one company, we're going to be much better prepared for whatever the next shock is because everyone in this room knows ... that's it coming, Tilton said.
(Reporting by Deepa Seetharaman; Editing by Gary Hill)