UAL/US Air merger could mean major capacity cuts

By Kyle Peterson

CHICAGO (Reuters) - If United Airlines parent UAL Corp and US Airways Group Inc merged, the pairing could result in massive cost savings for the new carrier as well as higher fares for the troubled industry.

But, in order for a merged airline to win those benefits through consolidation, the two carriers -- reported to be deep in merger talks -- would have to take on the painful tasks of closing hubs, grounding planes and slashing jobs where United and US Airway overlap.

"There's definitely the potential for it," said Stuart Klaskin at KKC Aviation Consulting. "What I question is whether those two airlines will have the political will to actually do that."

Industry experts say the prime benefits of consolidation come from reductions in capacity -- the number of seats for sale. Less capacity lets carriers charge more for tickets.

In the last two years, major carriers have removed capacity from less profitable domestic routes and bolstered lucrative international routes. The strategy has led to higher ticket prices and stronger airlines.

Fare hikes, however, have not kept pace with rising fuel costs, which are directly linked to the soaring price of oil. As a result, airlines posted big losses in the first quarter, and pressure is mounting on carriers to merge.

"Absent the removal of meaningful capacity reductions from the domestic airline industry, you don't get substantial consolidation benefits," Klaskin said. "That's the ugly, sad truth."

Klaskin said a United/USAirways merger could lead to a 25 percent reduction in their combined capacity. But he predicted capacity cuts closer to 10 percent.