Despite Delta, Mergers Not Easy
By Ted Reed 05/04/10 - 01:54 PM EDT

And why not? The economy is improving. Continental(CAL) and United(UAUA), which announced their intent to merge on Monday, are performing well. The airline industry, which cut capacity in response to the 2008 fuel-price spike and the subsequent recession, seems to have positioned itself to benefit from the recovery.

Still, "airline mergers are not easy work, in part because so many of the major influences are completely outside everyone's control" said consultant Robert Mann, who cited the SARS epidemic, the Sept. 11 attacks, rising fuel costs and a recessionary economy as examples.

"People on TV are saying that putting together these airlines is easy," said Robert Roach, general vice president of the International Association of Machinists. "It isn't. People say the Delta merger is all put together, but (Delta) is still trying to work out representation issues, and a few thousand of people have lost their jobs" since the merger. Additionally, Roach noted, pilots at US Airways(LCC) have yet to work out seniority integration five years after the merger with America West.

Today, it is widely forgotten that before the Delta merger, airline industry chatter frequently included the thought that airline mergers are disruptive and often unsuccessful.

Failure models abound, including Pan Am with National in 1978, Piedmont with US Air in 1987, American(AMR) with Reno in 1999 and American with TWA in 2001. Not to mention the 1986 Texas Air purchase of Eastern, whose stripped assets helped to build the new Continental.
The list goes on and on. Yet the warm glow from the Delta/Northwest merger seems to have overwhelmed the unpleasant memories.

So forgive Roach, who entered the airline industry as a TWA ramp worker, if he raises a few questions. The IAM, by the way, is the largest union at United, representing 16,000 workers: it also represents 9,500 Continental flight attendants.

"There are various scenarios in mergers -- how they intend to integrate and operate; whether certain cities lose service, which means you lose employees, employee pensions, benefit and job security, and the harm or benefit for passengers." Roach said. "We have not seen any details," he said. "Once we scrutinize the filing, once we do all the due diligence, then we will make a decision as to what position we will take."

Pilots at Continental and United seem willing to discuss a deal along the lines of the one that Delta negotiated with its pilots. But the leaders of both pilots unions say the Delta deal is just a starting point, particularly when it comes to outsourcing flying to regional carriers.
Asked about Cleveland's future on a conference call with reporters and analysts, Continental CEO Jeff Smisek, who would lead the new company, responded: "We understand how important good air service is to Cleveland (and) Cleveland will always be important to the combined carrier." However, he said, "We are always responsive to market demand (and) you need to look at where the demand is."

In fact, although Continental calls Cleveland a hub, that role must be defined broadly, because the Cleveland hub has only about 170 daily departures, mostly on regional jets. In 2008 and 2009, Continental briefly tried trans-Atlantic service from Cleveland, first to Paris, then to London, but shut it down in the recession. According to the Cleveland Plain Dealer, Continental has reduced Cleveland flights 24% since late 2007, compared with cutbacks of 18% at Houston and 10% at Newark. Its Cleveland workforce totals 2,200, while its affiliates employ another 1,000.

On Monday, local officials, including U.S. Rep. Dennis Kucinich, held a news conference to seek to assure that the importance of Cleveland Hopkins is not diminished in the merger. "I wouldn't call us a loser, because we don't know," said airport spokeswoman Jacqueline Mayo. "I don't think they have sat down with us and said 'this is what will happen.' I am sure that eventually, (they) will."

Of course, a key question involves regulatory approval. On the conference call, Smisek reminded that the partners have no international route overlap and that "Continental is strong where United is weak and United is strong where Continental is weak." From a regulatory standpoint, this is "a match made in heaven," he said.

Even for airline geeks, it is a challenge to find a route where Continental and United are the only carriers that provide service. Try it. The only one we found was Cleveland-Denver.
Still, it is a bit early to declare victory. Recall that on the Delta earnings conference call in April, CEO Richard Anderson warned that regulatory approval now comes more slowly than it did in the latter days of the Bush administration, when the Delta/Northwest merger was approved in less than seven months.

Delay is the foremost enemy of this proposed merger, because that allows for more of the exogenous events that always have and always will plague the airline industry.
-- Written by Ted Reed in Charlotte, N.C.