The Canadian regulator has blocked the extended alliance between the largest U.S. airline United Continental Holdings Inc. (UAL) and Canada’s No. 1 air carrier Air Canada on antitrust grounds.
Currently, the carriers are jointly managing their fares and schedules as well as marketing transborder flights through their existing joint venture. In October 2010, the carriers proposed to enhance their joint venture agreement by combining revenues mutually on all of their Canadian and U.S. operations.
The enhanced deal is expected to bolster their competitive position by expanding their presence in the transborder network. The proposal includes extension of Air Canada services to 59 U.S. cities and United Continental services to 16 Canadian cities.
However, the Canadian regulator said the proposed add-on would create a monopoly in 10 transborder routes and substantially reduce competition in the remaining nine. In addition, the regulator is also apprehensive that the combined entity would be unfair to consumers as it would lead to high prices and fewer choices.
In October, United Airlines merged its operations with Continental Airlines and formed a new entity United Continental Holdings Inc., overtaking the largest U.S. airline Delta Air Lines Inc. (DAL).
We believe United Continental is benefiting from industry consolidation as well as improved economic conditions despite steeply rising fuel prices. The company is poised to benefit from industry leading unit revenue growth, solid on-time performance, strong execution, competitive costs, capacity cuts as well as fleet and network optimization.
On the flip side, high unionization, a time-taking United-Continental integration process as well as competitive threats keep us cautious on the stock.
Hence, we are currently maintaining our long-term Neutral rating on United Continental. The stock retains the Zacks #3 (Hold) Rank.
DELTA AIR LINES (DAL): Free Stock Analysis Report
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