Continental Airlines brand destined for the dustbin
Sunday, September 26, 2010 Last updated: Sunday September 26, 2010, 3:11 PM
BY RICHARD NEWMAN
The Continental Airlines brand, which former Chief Executive Officer Gordon Bethune famously took "from worst to first," will soon follow Pan Am and TWA into the pages of aviation history.
For more than 10 years Continental has been flying more trans-Atlantic flights from the New York area than any other airline and has earned the respect of high-paying business travelers around the world. The Houston-based carrier's "Work Hard, Fly Right" slogan is ubiquitous on New York-area billboards.
But within a year the name that dates from 1937 — when aviator Robert F. Six changed it from regional carrier Varney Speed Lines — will be removed from such ads and from the airline's fleet of more than 500 aircraft, replaced by the United Airlines brand name.
"Continental has been a major presence in New Jersey and the East Coast for a long time,'' Rutgers Professor Joseph J. Seneca said of Continental's pending union with United Airlines, expected to be made official by Friday. "But the industry has gone through so many changes, people have come to expect them."
Under the latest airline merger agreement announced in May, Continental's globe logos on the tail fins will survive and the company will be run by Continental CEO Jeff Smisek. But the headquarters will be in United's hometown of Chicago.
The deal, valued at more than $3 billion, will allow the new United Airlines to overtake Delta, Air France-KLM and American Airlines to become the world's largest carrier based on traffic when the stock swap is completed. The parent company will be called United Continental Holdings Inc. and will trade under the ticker UAL on the New York Stock Exchange. United shareholders will hold 55 percent of the shares.
Executives at both airlines expect the merger will generate $1 billion to $1.2 billion in savings and new revenue by 2013.
The merger of the country's third- and fourth-largest airlines is a sign of the times for so-called legacy carriers, the hub-and-spoke players that predate the 1978 deregulation of an industry whipsawed by the Sept. 11, 2001, terrorist attacks, the SARS outbreak in Asia and the oil price shocks of two years ago.
At the same time, competition from domestic airlines with lower operating costs — among them Southwest, JetBlue and Spirit — whittled away at the legacy carriers' market share, forcing them to lower their fares.
Taken together, these forces compelled United and Continental to combine. The carriers lost more than $900 million last year while generating a combined $29 billion in revenue and serving 144 million passengers. In the second quarter, both airlines returned to profitability. The two carriers employ 88,000, including Continental's 14,000 at Newark, where United has a much smaller presence.
"The Continental name will be gone, but it will be a stronger airline," aviation consultant Mike Boyd said. "United is strong in Asia, Continental is strong in Latin America, and there is little overlap."
Shareholders approved the merger on Sept. 17, but another obstacle remains. About 50 passengers and travel agents filed a lawsuit in San Francisco and have asked a federal judge to issue an injunction to block the merger. They argue it violates antitrust laws and will result in less competition, higher fares and less service.
"[The merger] creates the largest airline in the history of the industry, creates monopolies in 13 separate markets, it will reduce capacity, service will be less, prices will rise," said Joseph Alioto, attorney for the plaintiffs. The plaintiffs include one from New Jersey, Ted Friedli, owner of Excel Travel in Long Branch, who declined to comment while the case is pending.
Alioto said he represented travelers and travel agents in a similar suit in 2008 to try to stop the Delta-Northwest merger and negotiated a settlement with the carriers shortly before that deal closed. He declined to discuss the terms of that agreement.
According to a report by Bloomberg News, Smisek appeared in court last month to respond to plaintiffs' allegations and acknowledged in his testimony that the merged airline would be the only choice for consumers seeking to fly non-stop between some cities, including Denver and Newark. Smisek said the two airlines each have about 3,000 employees at their respective headquarters and the merger will result in 1,500 to 1,800 of those employees losing their jobs. Elimination of "front-line" employees — flight attendants, reservation agents and pilots — will be "very modest indeed," Smisek said.
At Newark, it is possible the deal will actually result in lower fares on some well-traveled routes. That is because the airlines agreed to give up 18 round-trip slots at Newark to Southwest Airlines to appease federal government antitrust watchdogs at the Department of Justice, who surprised many industry experts by ruling relatively quickly on the merger request.
The agency completed its review last month and decided not to stand in the way. The Justice Department said on Aug. 27 that the merger would result in "a limited number of routes where United and Continental offer competing non-stop service" and that the divesture of slots to Southwest "resolves the department's principal competition concerns."
Continental carries one in every seven passengers at Newark, where fares are higher than the national average and above the average at the two major New York City airports, where there is more competition.
"When Southwest comes in with a $200 fare, there is a hugely strong incentive for others to match it," said Kevin Mitchell, chairman of the Business and Travel Coalition in Radnor, Pa.
Separately, JetBlue Airways announced plans this month to start flying in the spring between Newark and Boston, a route on which Continental has charged more than five times what other airlines charge at John F. Kennedy International and La Guardia airports.
If the stock swap is completed by Friday, the combined carriers will start making decisions on which company's policies and procedures will prevail on everything from flight attendant hotel-stay policies on layovers to customers' frequent flier benefits.
"This is not a culture clash, it's a culture fit," said Mike Boyd, an aviation consultant in Colorado. Both airlines are focused on customer service and on building upon their already substantial international reach, he said. The most difficult part of the merger will be integrating workforces, Boyd said.
That will be easier for the work groups that belong to the same unions, as is the case with pilots. But other groups belong to different unions. United flight attendants, for example, are represented by the Association of Flight Attendants and Continental's belong to the International Association of Machinists and Aerospace Workers.
Employee groups will have to agree on representation before joint contracts can be negotiated, a process that can take years. Continental, which unlike United has not been through a bankruptcy in recent years, also has had better relations with its unionized workers.
Meanwhile in Cleveland, local officials concerned Continental's hub there will be less relevant because of United's strong position in Chicago, recently announced an agreement with United and Continental to keep at least 90 percent of their flights operating for two years after they merge.
New Jersey travelers should hope Continental's standards of service will survive even though the name will not, said East Rutherford travel agent Rick Ardis. "To me, Continental has been a bit more stable and definitely more consumer friendly [than United]," he said. "Among the major carriers, they have the best customer service."
"A lot of corporate travel managers feel prices will go up," said Kevin Mitchell, chairman of the Business Travel Coalition in Radnor, Pa.
But they also expect fare hikes will be partially offset by fliers' ability to get corporate discounts within an expanded route system, he said. And at Newark, fares will likely come down quite a bit on some routes because of new service planned by low-cost carriers.
Airline officials say it's too soon to say which company's policies and service offerings will prevail and it will be a while before any changes are noticed by customers, Julie King, a Continental spokeswoman, said last week in an e-mail. The consolidation of the two companies under a single Federal Aviation Administration-approved operating certificate, with all employees guided by the same operating manuals, will take "at least a year," she said.
Until then, the companies will continue to operate separately, except that on what the airlines are calling Customer Day One, to be held "sometime in the spring," the carriers will begin to link reservation systems, kiosks, check-in systems and frequent-flier programs, she said.
Some employees' feelings about the merger are mixed.
"It's a good thing," Graziela Lindahl of Maplewood, a clerk in Continental's accounting office at Newark, said of the merger, as she made her way to an employee shuttle bus behind Terminal C. "I'll be proud to be working for the biggest airline in the industry."
"The anxiety level is high because we don't know what the future holds,'' said Ken Diaz, a United flight attendant and union leader stationed at JFK. United flight attendants hope for a contract with Continental wages, which are higher, and United work rules, which are less demanding, he said.
Some Continental workers at Newark who spoke on condition of anonymity last week said they were concerned about job security.
"People with 15 years' seniority have no concerns, but the others do," said a cargo agent.