United Airlines has agreed to buy Continental in a $3 billion-plus deal that would create the world's largest carrier with a commanding position in several top U.S. cities.
The new United would surpass Delta Air Lines in size, which should help it attract more high-fare business travelers. It will fly to 370 destinations in 59 countries.
The good news for investors is that an airline with global reach and over $7B in cash can withstand plenty of economic turbulence. The bad news is their focus on business travelers. I still believe the global economy will experience a second phase of its Great Recession. Businesses facing declining earnings will cut back on nonessential expenses like business travel. Furthermore, the declining availability of cheap petroleum (Peak Cheap Oil) will put a permanent floor under fuel prices this decade, permanently raising variable costs across the entire transportation sector.
Don't forget that United has already been through a bankruptcy this decade in the aftermath of 9-11. This industry isn't exactly immune to shocks whether they're endogenous (crashes, hijackings) or exogenous (fuel costs).
Feel free to take a chance on playing this merger if you understand the airline industry. I'll pass and wait for clearer skies.
Full disclosure: No position in UAUA or CAL.
