Three Reasons The United Stock Deal Is Meaningless

Three Reasons The United Stock Deal Is Meaningless

When it's done they'll be the world's largest carrier--but is the marketplace all wrong for them regardless of size?

So just a matter of hours ago, the word came out that United was looking to purchase Continental (NYSE: CAL) for three billion dollars worth of United (NASDAQ: UAUA) stock, a move that no doubt has Continental shareholders doing handsprings.  And indeed, this will turn United into the largest air travel carrier in the world, giving them a superior position over a lot of other airlines.  But the question of the day here is, does it really matter?

After all, United is now a massive airline, bigger than even competitor Delta, and that goes a long way toward drawing business travelers who generally pay higher fares for better tickets.  United also now has multiple hubs as a result, including big domestic locations like New York and Los Angeles, and is now one of the biggest international flights on Earth.  But despite the rosy scenarios being peddled by current Continental CEO Jeffrey Smizek, there's a whole lot of rocky sky ahead.  Here's why:

1. The overall economy is still in bad shape.  Some signs of improvement can be seen, yes, but taken together and weighed against the whole this is like saying we're only trapped under twenty feet of rock instead of fifty.  Businesses--including business travelers--have made most of the cuts they could possibly make and remain operational, so looking for them to increase their travel budgets sure seems like a foregone conclusion at this point.

2. The consumer markets are worse yet.  Again, admittedly, the consumer does appear to be doing at least a bit of bouncing back, but to expect a return to the old days at this point is wishful thinking gone too far.  Look what went into the consumer spending sprees of the mid-2000s: depleted savings and home equity loans.  Home equity is tapped out for most consumers and many of these same consumers are so underwater it isn't even funny.  Looking for THEM to increase their travel budgets looks more like a bad joke than any credible economic stance.

3.  Oil isn't getting any cheaper.  Even Smizek recognizes that oil costs--and thus, fuel costs--are "high (but) manageable"  (he actually used the word "and" in there so I needed to use but for grammar's sake).  Oil is a depleting resource.  It's not really subject to market fluctuations the way renewable resources like, say, wheat would be.  Oil costs aren't going to come down by any significant amount unless something destroys demand for it somewhere else, and I'm having a tough time imagining just what that something would be. 

So pardon me if I'm a bit underwhelmed by the meeting of the also-rans (United was formerly number three in traffic rankings behind Delta and American, and Continental was fourth), but the market itself for air travel just seems so incredibly weak right now that their merger doesn't seem like it'd do much good.

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