Can Continental, United work out seamless merger?
By Dan Reed, USA TODAY
United (UAUA) and Continental (CAL) airlines took 2½ years to decide to merge, negotiate a deal and convince government regulators that the marriage wouldn't harm competition.
Friday, shareholders for the two companies will vote on the merger. If they approve it as expected, they'll create the world's biggest airline by many measures. The vote is the last step before closing papers are signed on Oct. 1, and a new United Airlines is born.
Then comes the hard part: Leaders of United and Continental, currently the nation's third- and fourth-largest airlines respectively, must put their very different operating styles, workforces, fleets and corporate cultures together — and in a way that works for the travelers, communities and shareholders they serve.
It's a task that could take 18 months or more, if recent mergers are a guide. It will be about six months before fliersnotice much difference. It could be five years before the merger can be gauged a success. Some mergers and industry analysts warn that it won't be an easy task.
"Mergers typically fail in one of two places," says Thomas Lys, who teaches about mergers and acquisitions at Northwestern University's Kellogg Graduate School of Management. "The first place is that it's a stupid deal. It just makes no sense, because there are no efficiencies to be gained from it. The second is that while it makes sense, you can't pull it off."
On paper, Lys says, a combined United and Continental makes sense financially and operationally. By 2013, the new company expects to generate up to $900 million more a year in revenue than the two generate today and realize up to $300 million in cost savings. "But," he warns, "the integration phase of this is not going to be that simple. Airlines are not simple companies. They have complex financial structures. And there are huge labor and operations components that will have to be harmonized in order for thoseefficiencies to be obtained."
Robert Shumsky, a management operations professor at Dartmouth's Tuck School of Business, says that once the deal is done on Oct. 1, "you won't notice much of a difference."
"The bigger question," he says, "is five years down the road, will you have a very large, well-run company, or something that has devolved into the lowest common denominators of the two?"
The goal is a large, well-run company. The airlines estimate a merged United would generate about $30 billion in revenue a year from carrying about 144 million passengers to 370 destinations in 59 nations. They say it would provide the broadest global travel network in the world, which should appeal to more travelers, especially high-paying business travelers.
To be successful, Shumsky says, the new United must incorporate Continental's customer-friendly ethos.
Continental ranks higher than United in quality and service in a USA TODAY analysis of government and consumer survey data from 2005-2010. Continental is seventh, and United, 11th, in the analysis of 12 U.S. airlines using Transportation Department consumer complaint statistics, the Airline Quality Rating system by professors at Wichita State and Purdue universities, and consumer surveys by Zagat Survey and J.D. Power and Associates.
"The Continental culture, which I think deserves its good reputation, is very customer-focused," Shumsky says. "But it likely will be diluted somewhat by the United culture, which has been dominated for years by adversarial relations between labor and management."
In the long run, he says, he thinks the consumer will get a better airline and travel experience. Continental's CEO, Jeff Smisek, will run the new company. But that doesn't guarantee that a Continental culture will prevail. Compromises will have to be made in merging the two carriers' operations and workers. Some services offered by one airline that some travelers like could be eliminated or watered down. But other customers may experience new, enjoyable services previously unavailable to them.
"The (greater the) extent to which they can transfer the Continental service ethic into the new airline, the better off they're going to be," says Bill McKnight, leader of the airline consulting practice at A.T. Kearney.
There are opportunities that the new United can exploit to benefit travelers and itself. But there are ways in which the merger could go wrong. Here's a look at what to expect and some challenges the airline faces:
Travelers probably won't see any difference until spring, when management will schedule what it's calling "Customer Day One." That's when the two airlines will start selling tickets through a single website, employees will wear new uniforms, and airport signs and airport operations will be combined. One of the most noticeable signs: Planes will bear United's name, but their tails will have the Continental globe logo.
Continental currently offers only two classes of service: coach and BusinessFirst, a hybrid class between conventional business and first class. United offers first and coach classes on most domestic flights. It offers coach, business and first classes on most international flights. The new United eventually will have to standardize its seating.
No decisions have been made yet on whether United's Mileage Plus or Continental OnePass program will survive or a new frequent-flier program will be launched to replace the existing programs. Combined, United and Continental may have up to 91 million frequent-flier program members. That compares with 74 million at Delta, which currently is the world's largest airline. American has 64 million members.
No decision has been made on the name and operation of the United Red Carpet Clubs and the Continental Presidents Clubs located in airports around the world. Members of each club already enjoy access to most of the other's clubs because both are members of the Star alliance.
There's not much opportunity to raise fares as a result of the merger, because United and Continental currently compete directly on only 14 domestic and no international routes. That was a key factor in the government's approval of the merger. The new airline also will continue to compete with other big network carriers for connecting travelers via their nearby hubs, and with low-cost carriers for non-stop travelers on 76% of its existing routes.
The new United and its regional affiliates will offer about 6,100 flights a day here and overseas. Both carriers are members of the Star global alliance, a team of 28 airlines from around the world that collectively serves 1,172 destinations in 181 countries.
Domestically, United is a major competitor in the mid-Atlantic, Midwest, Rocky Mountain, Northwest, Pacific Coast and Hawaiian markets. Continental is a significant player in the Texas, South and Northeast markets. Internationally, United has extensive service rights throughout Asia. Continental is a strong No. 2 carrier on routes to and from Mexico and Latin America. It operates its Continental Micronesia unit on flights throughout the western Pacific and to Japan via Guam. Both serve Europe.
United is bringing six hubs to the marriage: Chicago, Denver, Washington Dulles, San Francisco, Los Angeles International and Tokyo Narita. Continental has four: Houston, Newark, Cleveland and Guam. There's been concern that Cleveland will shrink or be eliminated. United and Continental this week agreed to continue operating a Cleveland hub that is at least 90% of the current hub's size for the next two years, and to pay Cleveland a $20 million penalty if it closes the hub within five years.
This is an area the new airline will have to work out. Both carriers currently fly Boeing aircraft on international routes. But Continental sticks with Boeing 737s and 757s on its domestic routes, while United flies a mix of Boeing 757s and Airbus A320s. Flying both 737s and A320s on similar domestic routes would require maintaining two sets of pilots, maintenance programs, spare parts and training programs. And 737s and A320s don't have the same number of seats. United's fleet of 747s and 767s are aging and will need to be replaced soon. Continental and United have orders for the new Boeing 787 Dreamliner, but United also has placed orders for the 787's competitor, the Airbus A350.
On top of resolving the compatibility issue, the new United likely will need more wide-body jets to avoid getting left behind in the international travel arena.
United uses regional airlines to fly many of its routes. Its pilots' contract lets regional partners fly planes with up to 70 seats. Continental has a more restrictive contract that limits regional partners to planes with 50 seats. It also contracts out a smaller percentage of its flying to regional carriers. The head of the Continental unit of the Air Line Pilots Association recently floated the idea of negotiating a unified contract that would phase out the use of all regional airlines and shift that flying to pilots at the new United.
Merging workers is the most challenging and difficult aspect of any airline merger. An indication of the difficulty: America West acquired bankrupt US Airways and took its name in 2005, but has yet to negotiate unified contracts for all workers and continues to operate what essentially are two airlines under one name. Labor-management relations at United have improved, but historically have been rocky. Since its turnaround began in the mid-1990s, Continental's labor-management relations have changed from acrimonious to arguably the best in the industry.