Merger Leaves Questions Unanswered
by Darren Shannon
darren_shannon@aviationweek.com
WASHINGTON
Even though the worst kept secret in the U.S. airline industry now is confirmed, many details from the newly announced merger between United Airlines and Continental Airlines are being left intentionally vague by leaders of what could be the world’s largest carrier.
The May 3 announcement and conference call did include some key data, although many of the major points — such as the Chicago headquarters, the brand and the roles for the airlines’ two top executives — had been known for some time through a constant stream of leaks from unidentified, but well-informed sources. Yet opponents, labor groups and regulators still will be unsure what the two companies have planned.
Both Jeffrey Smisek and Glenn Tilton, who will assume the roles of CEO and chairman, respectively, during the analyst and media conference call continually promoted the benefits of the union. Time and again, they noted the minimal overlap of their networks, as well as its breadth and attractiveness to business passengers, and the $1.2 billion in annual synergies that will be generated by 2013 from this “merger of equals.”
And one-time costs of $1.2 billion, attributed to technology integration and fleet harmonization, although large are more than worth the “long-term synergy benefits” that will arise from this merger, noted Tilton during the call.
But these generalizations, reminiscent of comments made at the beginning of the Delta/Northwest integration, did little to answer some key questions. For one, it is unclear what size this new United-branded airline wants to be, and both Smisek and Tilton pointedly avoided a question on capacity.
Even a fleet forecast to 2014 causes confusion, with the upper range increasing the mainline fleet to about 750 aircraft from today’s 692, while the lower range reduces the mainline carrier to about 550 airframes. With 152 aging United Airbus narrowbodies joining some 200 Next Generation Boeing 737s in Continental colors, can we read anything into the new company’s decision to retain the Houston-based airline’s livery with just a name change?
It should be noted that that fleet forecast does not include United’s recently signed A350 order, but does contain the Continental 787s already scheduled for delivery beginning next year.
The new United also is unclear what will happen to regional capacity, and assurances that all eight domestic hubs will be retained have the same hollow ring to them as Delta’s when it first announced its intention to merge with Northwest. However, Smisek did note that there is “a lot of flexibility” from the different feeder contracts and their varying expiration dates, and ExpressJet, which in the past has been on the rough end of Continental’s strategic initiatives, was quick to issue its own release noting that its contract for at least 190 aircraft is valid through to June 2015.
But Smisek’s comment also raised a question about Continental’s more restrictive scope clause, and whether it will stymie the new airline’s ability to outsource capacity to its regional partners. Another concern is what price, if any, the airline will have to pay to relax this clause.
Scope will be just one of many issues both carriers’ pilots union will want to discuss, and Continental’s pilots in particular will want to know how safe their defined benefit pension is in a company that terminated its own during its Chapter 11 reorganization in 2006.
Labor will want to be rewarded for supporting this merger, and both ALPA and the Association of Flight Attendants-CWA said they want improved contracts before the merger is completed. For now, management is using Delta’s contracts as an industry benchmark, but the next few months will see how acceptable that is.
Management also thinks it will gain the requisite regulatory approval before the end of the year, with a single air operator certificate following in the first half of 2012. This ambitious timeline mirrors the integration of Delta and Northwest, so the creation of the world’s largest airline in less than a year has precedent, but the political environment is very different. That does not mean this deal will be rejected, and it may even be approved with few changes, but the current head of the U.S. Justice Department’s antitrust division Christine Varney has shown a willingness to oppose her equals at other departments — notably Transportation — if she believes an agreement will adversely affect U.S. consumers.
There are many valid reasons for Continental and United to merge, and not just because, as Smisek says, the planets aligned. But a lot more transparency is needed before the all parties can accept the carriers’ call to “Let’s Fly Together.”
