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THE MERGER, FROM OUR VIEW
By Joe Brancatelli
May 6, 2010 -- You know, I don't care. That was my truest reaction to the not-totally-unexpected news on Monday that United and Continental airlines were about to embark on a (Nudge, nudge! Wink, wink!) "merger of equals."
As I explained in my companion column for Portfolio.com, mergers have never brought the stumbling legacy carriers what they want: pricing power, control over supply and financial stability. In a free market, when anyone with access to a few planes and a horde of cash can enter with a disruptive innovation, mergers of legacy carriers only serve to make them bigger, easier targets.
But all that said, we do need to plot out our own thoughts, reactions and strategies. After all, Skygods can play their games--Did the image of Doctor Evil and Number 2 moving planes around a gigantic map come to your mind, too?--but this is our life on the road.
WHAT'S IN IT FOR YOU?
Nothing. If United and Continental actually do merge, there will be no benefit for you. Since the two carriers are already full partners in the Star Alliance and offer extensive code-shares, airport-club reciprocity and linked frequent flyer programs, there isn't much more a merged single entity can offer. (One exception: If you have orphaned miles in either United Mileage Plus or Continental OnePass, you'll eventually get to combine your balances.) On the down side, there is the very real risk of labor unrest and operational disruptions if the carriers punt the merger process. Moreover, as management teams from both carriers divert attention to merger issues and ignore day-to-day basics, there is the real chance of a sharp decline in service while the Skygods do what they do. You have a better chance of seeing sharks with frickin' laser beams on their heads before you'll see this merger improve anything for your day-to-day life on the road.
WILL THE REGULATORS INTERVENE?
Probably not. Even assuming more active Justice and Transportation departments in the Obama Administration, it'll be hard to overlook the precedent that the Bush Administration created. If Delta and Northwest were allowed to merge, there isn't a logical reason to stop United and Continental. Besides, there's surprisingly little overlap between the two carriers. According to a chart published yesterday in Aviation Daily they have only 11 overlapping routes from Continental's Houston, Newark and Cleveland hubs. There are only 11 overlapping routes from United's Chicago/O'Hare, Denver, San Francisco and Washington/Dulles hubs. Only two routes overlap in Los Angeles, where both carriers claim a hub-like presence.
I'd be shocked if the federal regulators go near this before Election Day. Why should they? Saying yes will infuriate some people. Saying no or demanding carve-outs would do the same. But doing nothing before the mid-term elections could easily (and will) be positioned as the regulators doing a thorough job. And even if the merger is approved by the end of the year, United and Continental are admitting it'll take until at least 2013 to fully integrate the two airlines. That's not surprising considering they have a raft of labor issues, real questions about their existing and future fleets and continuing responsibilities relating to United's 2005 pension dump. And there are guaranteed to be lawsuits surrounding all sorts of financial issues relating to the speed with which this merger was crafted. (If you believe the patter, it all went down in less than 30 days and lots of reliance was placed on the due diligence from the 2008 discussions between United and Continental.) A raft of law firms that are the corporate-governance equivalent of ambulance chasers are already sniffing around the edges of Monday's announcement.
WHAT TO WATCH FOR
The "merger of equals" nonsense notwithstanding, this very much looks like a Continental takeover of United. Yes, the name and the Chicago headquarters come from United Airlines. But the power player is Continental chief executive Jeff Smisek, who will run the combined carrier. (Glenn Tilton, United's bumptious boss, kicks himself upstairs to "non-executive chairman" and gets his United-funded glide path to retirement.) So the issue is who gets the key jobs at the next level. My guess is that Smisek will favor his own team at Continental. Besides, most of United's existing management team have proven to be overmatched, incompetent or Peter-principled stooges. That said, I wouldn't take a wholesale transfer of Continental executives to the top of the new carrier to be a great sign. Yes, Continental now is a better airline than United. But since Smisek's ascension to the top job earlier this year, he's undone a lot of what made Continental notably different. He immediately junked the airline's previous policy of not nickel-and-diming customers and adopted the questionable à la carte strategy pioneered among legacy carriers by United.
WHAT ABOUT (FILL IN THE BLANK)?
Since this merger was about corporate egos and gamesmanship and done rather quickly, it's virtually guaranteed that no one at either carrier has yet discussed the gigantic service gaps between the two airlines. So there'll eventually have to be real planning and major decisions about the following items: United Airlines operates an aging first-class cabin on most of its international flights. Like all other U.S. carriers except American Airlines, Continental has dropped international first class. … Continental is slowly installing lie-flat beds in its international business class. Even more slowly, United has rolled out a much-inferior seat-bed in its business class. … United operates Economy Plus on most flights and it has been one of the airline's few loyalty builders among higher-yield business travelers. Continental has nothing like it. … United has added a "first class" on many United Express regional jets. Continental Express has nothing like it. … Continental has begun installing at-seat television systems on some of its domestic jets. United has been somnambulant in this area. … Neither has been particularly aggressive in their respective rollouts of onboard WiFi. ... Several years ago, United slashed its transcontinental capacity and put in the three-class p.s. concept on Boeing 757s between New York/Kennedy, Los Angeles and San Francisco. The product is rapidly aging and has never been tried on other routes. Continental concentrates its New York Metro operations at Newark and flies transcons mostly with traditionally configured two-class Boeing 737s.
OK, LET'S TALK FREQUENT FLYER PROGRAMS
It might take several years, but there naturally will be a full-on merger of Mileage Plus and OnePass. Everyone's miles will be safe. What they'll be "worth," however, is anyone's guess. The most likely assumption is that a totally new plan will be created. Logic dictates that the Delta SkyMiles program, which offers last-seat availability, but at very expensive levels, will be something of a model. And a lot of the discussion will revolve around Chase, which issues both the Continental and the United credit cards. Chase is deep into United miles--it basically saved United by taking Mileage Plus miles for everything from credit-card holdbacks to coffee creamer during strategy meetings--and what Chase wants will matter more than what you want. I suspect (and, really, this is just a guess) that United and Continental might try to forge some sort of unified elite program for 2011 even if the merger won't be done by then (and it won't). Your best solution: Do what you do now and don't worry about trying to outguess what hasn't yet been created. Just make sure not to let your miles expire in either program.
WHITHER AMERICAN AIRLINES?
With a combined market share of about 24 percent, the United-Continental entity would be larger than Delta (21.5 percent). That leaves American Airlines, with 16.4 percent of the market, a distant third. That normally shouldn't matter, but airlines (especially American) have corporate egos, too. Besides, American has real issues: It hasn't been able to nail down its antitrust immunity with British Airways, its OneWorld Alliance partner. By contrast, the Star Alliance will be stronger with United/Continental and Lufthansa. And Skyteam, fronted by Delta and Air France-KLM, is also moving ahead nicely. An obvious solution for American: Grab US Airways. It has a Southeast hub in Charlotte that American has long craved. It has serviceable hubs in Phoenix and Philadelphia. It also has what's left of the old East Coast Shuttle operation, something American Airlines has coveted for decades. From a strictly tactical standpoint, US Airways is trying to swap its New York/LaGuardia operation for some Delta assets at Washington/National. As it falters in the crucial New York market, American needs/wants those New York assets at least as much as Delta. But there would be problems: Regulators might look askance, as they continue to oppose the Delta-US Airways swap. And US Airways is run by Doug Parker, who fancies himself as a mouse that roars. He made a run at Delta a couple of years back and tried for a United merger earlier this year. The corporate-management issues could be sticky in any potential AA-US deal. And US Airways' ongoing labor issues are daunting, especially since American has its contract issues, too.
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ABOUT JOE BRANCATELLI Joe Brancatelli is a publication consultant, which means that he helps media companies start, fix and reposition newspapers, magazines and Web sites. He's also the former executive editor of Frequent Flyer and has been a consultant to or columnist for more business-travel and leisure-travel publishing operations than he can remember. He started his career as a business journalist and created JoeSentMe in the dark days after 9/11 while he was stranded in a hotel room in San Francisco. He lives on the Hudson River in the tourist town of Cold Spring.
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This column is Copyright © 2010 by Joe Brancatelli. JoeSentMe.com is Copyright © 2010 by Joe Brancatelli. All rights reserved.