Continental and United Merger Analysis

United Airlines has recently been very interested in a merger with another airline. They were first in talks with US Airways, which fell through. Thereafter, they have been in talks with Continental Airlines ( IATA : CO ) and now the fruits have come out.
Many reputed news sources, including Wall Street Journal, claimed last week that the merger would be announced on Monday. Making all the rumours true, the two airlines today announced their merger. The airline would be called United Airlines and headquarted in Chicago. In the transition period, the CEO will also maintain an office at Houston, where current Continental headquarters are at.
What would this merger mean to the airline industry – to United, to Continental, to employees, to other airlines, to airports, to manufacturers, to passengers ? Let’s have a look.

Why merge ?

Why would airlines merge ? This is question that stumbles upon every passenger and the general public.
Over the time of airline history, a number of airline mergers have taken place. The core goal of all of these mergers have been one – financial survival.
Airline industry is historically an industry with a very low profit margin. Due to the airline industry’s sensitive connection with the global economy, a slump in the global economy can be very damaging to the whole industry.
As the industry has been passing through the worst financial situation in its history, caused by the global recession – another issues became a serious concern for profit. Overcapacity. Overcapacity in simple terms is having too many seats in the market than needed to fly the passengers in a certain market.
This is partly caused due to the Poisson process in aircraft ordering. Which is, having a slack of aircraft ordering for a certain period and then the arrival of a number of heavy orders around the same time. The last Poisson Process could be mainly seen during the 2005-6 time period. Because an usual aircraft delivery takes nearly two to three years, this flock of ordered aircraft started arriving right when the recession started and demand decreased, thus causing an overcapacity.
The U.S airline industry, already hurt and barely recovering from the 9/11 attacks was the hardest hit. This made consolidation inevitable, and essential, in this market. Just like in nature, this would see the weaker players being absorbed into the stronger ones – or the get together of two weak players – for the survival of both.

Background

The CO-UA merger talks were announced in mid April, while UA was having discussions with US Airways in the same time. The talks seemed to have come to a stall, when Continental came to a dispute over the share prices. But this was later solved.
Jeff Smisek, current CO CEO, will become the CEO of the merged company while Glenn Tilton, current UA CEO, will assume the role of non-executive Chairman. Smisek is expected to take over the Chairman post after a two year period.
From the outlook of things, it appears that the new management would consist with a majority of Continental executives.

Roots

Continental Airlines

IATA: CO ICAO: COA

Founded : 1931 ( as Varney Speed Lines )
Commenced Ops : 1934

Current Parent Company : Public ( NYSE:CAL )

Fleet : 339 ( + 83 orders ) excl. subsidiaries

Destinations : 262 excl. subsidiaries

Hubs : Cleveland, Guam, Houston, Newark

Alliance : Star Alliance

Frequent Flyer programme : OnePass

Headquarters : Houston, Texas

CEO : Jeff Smisek

2010 Q1 financial result : Loss of $146m ( Lost $136m in 2009 Q1 )

United Airlines

IATA: UA ICAO: UAL

Founded : 1926 ( as Boeing Air Transport )

Parent Company : UAL Corporation

Fleet : 359 ( +50 orders ) excl. subsidiaries

Destinations : 114 excl. codeshare

Hubs : Chicago, Denver, Los Angeles, San Francisco, Washington D.C

Alliance : Star Alliance

Frequent Flyer programme : Mileage Plus

Headquarters : Chicago, Illinois

CEO : Glenn F. Tilton

2010 Q1 financial result :Loss of $82m ( Lost $382m in 2009 Q1 )

Impact and Effects

Brand

It was widely expected, and was almost obvious, that the Continental brand will go down and United brand name will survive. This is due to the bigger brand recognition United has, globally. Although one could argue that Continental is a brand with a higher appreciation, which is true, its very low brand recognition in Africa and Asia paves the way for the adoption of United brand. This will be important to the new carrier, as United already has a large Asian operation ( which comes from Pan-Am ).
Current brand appreciation of United might not be very important as the brand positioning by new, largely CO, management would be different and will only come into full force after around an year of integration with the Continental brand. ( Read on to the end to see my personal take on the new combined branding. )

Employees

The merger is set to receive a mixed response from the existing employees of both companies. Although United employees can be expected to be largely supportive of the merger, Continental employees may have some concerns. These are..

The current Continental management and the new United will have to deal with the above issues and take actions to minimise employee worries and anger in the short-term.

The two carriers have almost identical union representations in many departments, which would help for a smooth merger.

Current Union Setup of two carriers

ALPA – Air Line Pilots’ Association, AFA – Association of Flight Attendants, IAM – International Association of Mechanists and Aerospace Workers, IBT – International Brotherhood of Teamsters

In the short term, there could be feelings of insecurity and anger among some employees, but in the long-term these issues will fade away.
During the integration process, matters such as Seniority, pension schemes and regional aircraft scope levels could cause some minor issues, but these are unlikely to cause any large damage to either the companies or the employees. As the integration process would run for around one year, these issues will get solved subsequently.
Although some minor problems are inevitable and unavoidable, the correct approach by the management will make this a smooth merger for employees and the companies alike.

Fleet

Perhaps the most interesting part in this discussion, the aircraft fleet would be the most important part in the new United.

Let’s have a look at the two carriers’ current fleet.

Continental
Mainline
737-500 – 34
737-700 – 36
737-800 – 117
737-900 – 12
737-900ER – 30
All CFM56 powered

757-200 – 41
757-300 – 21
All RB211-535 powered

767-200ER – 10
767-400ER – 16
All CF6-80C powered

777-200ER – 20
All GE90-90B powered

Continental Express
Operated by Chautauqua Airlines and ExpressJet Airlines
ERJ145 – 221 ( by end 2Q )
All AE3007 powered

Continental Connection
Operated by Cape Air, Colgan Air, CommutAir, Gulfstream International

Beachcraft B1900 – 23
Bombardier Q200 – 16
Bombardier Q400 – 14

On Order
737NG – 53 ( rights for any 737NG model )
777-200ER – 2
787-8 – 11
787-9 – 14

Planned Inductions
3Q2010
777-200ER 2
737-800 9
Q400 1

4Q2010
737-900ER 2
Q400 5

Total Year End Fleet
Mainline 350
Regional 257
Total – 607

It is worth noticing that CO is due to receive its first Boeing 787 in 3Q2011. By the end of year 2011, Continental will have a fleet of six Boeing 787-8s. Four 737-900ERs as well as three 737-800s are also due to be delivered in 2011.
All Continental aircraft are operating in a two class configuration with some 757-200s and 777-200ERs having Flat Bed Business Class seats.

United

Mainline
A319-100 – 55
A320-200 – 97
All powered by IAE V2500 versions

747-400 – 24
All powered by PW4056

757-200 – 96
All powered by PW2037

767-300ER – 35
All powered by PW4060

777-200 – 19
777-200ER – 33
All powered by PW4000 versions

Mainline Fleet – 359

United Express
Operated by ASA, Colgan Air, ExpressJet, GoJet, Mesa, Shuttle America, Sky West and TransStates Airlines.

CRJ200-79
CRJ700-115
E170-38
EMB120-30
ERJ145-46
Saab 340 – 7

Total Regional Fleet – 315

On Order ( firm )
A350-900 – 25
787-8 – 25

Total Fleet – 674

United operates a four class service on most of its widebody aircraft, with most of its narrowbody fleet operating a three class configuration.

From the two airlines, Continental has a comparatively young fleet which is far more streamlined than United’s. In the short-term the fleet will likely not see any major changes. However, it is inevitable that the new fleet will be largely or fully Boeing based in the long-term.

Narrowbody

The combined fleet would have 539 narrowbody aircraft ( excluding regional aircraft ). This includes, 55 A319s, 97 A320s, 34 737-500s, 36 737-600s, 117 737-800s, 12 737-900s, 30 737-900ERs, 137 757-200s, 21 757-300s.
This combined narrowbody fleet, along with the rest of fleet, will allow for better management of capacity. Hence perhaps, the merged airline would not need all 539 aircraft. This would likely speed up the retirement of Continental 737-500s.
In the short term, the new United will try to keep both the Airbus A320 ( United ) and Boeing 737 ( Continental ) types in its fleet. However, in the long term, it is likely that the new United will select a Boeing based solution for its narrowbody requirements. This is almost obvious as the airline already holds 53 orders for Boeing 737NGs, and as the incoming United A320s are far older than their Continental 737 counterparts.
Continental currently makes very good use of its 757-200s on transatlantic legs to second-tier European destinations. It is likely that these Continental 757-200s would be kept in the fleet for a few more years to come. These Continental aircraft are currently set up in a two class seating. In contrast, United’s strong 757-200 fleet comes in two different configurations of which 13 aircraft are in a luxury p.s configuration. It is quite likely a number United 757s would be reconfigured or retired. Given the different engine choices, they are likely to keep seperate maintenance bases for the two airlines’ 757 ( and perhaps other types ) fleets. Complete 757 fleet will still continue to be workhorses for the airline, and the lack of a proper replacement is likely to keep most of the fleet busy for the foreseeable future.

The replacement decision on the narrowbody fleet is widely expected to come only after Boeing and Airbus have introduced their respective new narrowbody models. Hence it is safe to assume that the all three models – 737, 757 and A320, will remain in use till then, albeit with partial replacements.

Widebody

The new United will have an all Boeing widebody fleet that consists of 157 aircraft. In this mix are 24 747-400s, 10 767-200ERS, 35 767-300ERs, 16 767-400ERs, 19-777-200s, and 53-777-200ERs.

United’s original plan was to replace the 747s with Airbus A350-1000. However, this could now change. The new management might decide to accelerate the retiring process or perhaps a good choice to consider would be replacing them with 777-300ERs. Depending on the success of the merger and the outcome of loads on various rate, the carrier might even decide to go for the 747-8i as a 747 replacement.
The next types to see the end of daylight would likely be 767-200ERs and 777-200(A)s, both of which are now getting older. The influx of new fleet types will help to better manage capacity requirements which would eliminate the need for the above aircraft.
Since United’s and Continental’s Boeing 777-200ERs are in multiple different configurations, the new United will likely reconfigure some of these aircraft. The remainder of the 777-200ERs are likely to be based at different hubs to suit various product offerings ( two, three and four class ) for different markets.
The remaining 767 fleet will be largely replaced by the 787 when the deliveries begin.
It remains a question to see what would happen to the Airbus A350 order. It is likely the company will not immediately cancel the order and instead take a wait and see approach. This could result in a possible sale of the delivery spots to a different carrier although this decision will change significantly according to the post-merger route requirements.

The regional front would be discussed shortly.

Manufacturers

This merger will emerge as a clear win for Boeing. Both United and Continental have historically enjoyed a very good relationship with Boeing. The combined mainline fleet would consist of 557 Boeing aircraft from five aircraft families as opposed to 152 Airbus aircraft from a single family.
Future aircraft orders include orders for 105 Boeing aircraft from three aircraft families as opposed to 25 Airbus aircraft from one family.
It is very obvious that the new United with a new fleet would remain more loyal to Boeing. Airbus is associated with the risk of losing existing United’s order for 25 A350 aircraft – the only Airbus order from the to-be World’s largest airline. Airbus’s best bet is with building a new narrowbody aircraft that beats Boeing’s future narrowbody offering, in order to secure any future order from the new United. This prospect will be supported by the existing United’s 152 heavy A320 Family fleet, although these models could be partly replaced by Continental’s future 737NG deliveries.

Routes and Destinations

A large scale consolidation is expected in the domestic network. This will allow for the new United to better manage capacity and turn around the loss making routes as soon as possible.
The changes in the international network are expected to be slowly rolled out as there will be many hurdles to overcome.
The airline will benefit from being Star Alliance members thus having common terminals in most airports.

Europe – European network is poised to have a major overhaul which will see a better management of capacity and an upgraded product.
Continental will bring in a number of new second-tier destinations into the network. These are Copenhagen, Berlin, Hamburg, Dublin, Shannon, Milan, Oslo, Lisbon, Barcelona, Madrid, Stockholm, Belfast, Birmingham, Bristol ( to be discontinued from 7 Nov ), Edinburgh, Glasgow and Manchester.
Although some of these destinations might be cancelled, a majority will remain. The new United will benefit from having more aircraft types to select from, to use on these routes.
The two carriers will benefit from the Transatlantic Anti Trust Immunity they already have thus allowing for an easier integration of the two networks.

Asia – United’s Asian network expansion dates back to the Pan Am days when United bought out the rights for a number of destinations from the ailing Pan Am.
Although United was largely having its Asian presence centred around East Asia, Continental would add two new, important, countries to the network – namely India and Israel. This will increase the new United’s Asian network to 18 cities – with Delhi, Mumbai and Tel Aviv newly added.
The cities of Beijing, Shanghai and Hong Kong currently get service from both carriers.
The new fleet will allow for a shift of capacity on a number of routes while there is a chance of an expansion as well.
New United’s Asian network will span from Israel to Australia and Japan. Being a leading carrier to Asia, it is likely United will continue to pay special care to this market.

Perhaps, Continental’s best treasure on the international front would be its Latin American network which comes with a very good reputation for service. This would be a very important addition to the new United network and one which would give a serious competition to the other U.S international airlines.

None of the carriers currently serve Africa, with United set to launch its first service to Accara in Ghana on 20th June. This is a continent where Delta could give a serious competition to United, and it appears that the new United will take a cautious approach towards this important market.

Hubs

The two carriers currently have hubs at Chicago O’Hare, Cleveland, Denver, Houston, Los Angeles, New York Newark Liberty, San Francisco and Washington Dulles.
Of these hubs, it is expected that Cleveland ( Continental ) will see a significant capacity cut. The new United is likely to make best use of Continental’s current Newark hub. The new United’s largest hub would be current Continental hub Houston. United plans to launch a number of new routes from Houston. This is a very good move given that the carrier faces very little competition at Houston. The carrier will be still facing stiff competition from low cost carriers, specially Frontier ( see below in Regionals ) and Southwest, at Denver.
The two carriers will greatly unify their operations at their hubs and streamline the processes.
Maintenance stations are likely to stay the same in order to cater for the different engined total fleet.

Regionals

Photo Matt Willems/Airliners.net

Current three different regional units of the two airlines will likely fall under one identity as United Express. But this would be perhaps the most challenging integration encounter for the new management.
The three regional units uses a vast number of jet operators for the flights. This is mainly due to the various pilot scope clause levels at these airlines ( scope clause – an agreement signed between the airline pilot unions and management limiting the seat capacity of aircraft they will fly. If the scope clause is at 70 seats – this means that all aircraft with 70 or less seats will have to be flown using outsourced regional carriers and their pilots ). A reduction of capacity at Cleveland, which serves a large share of the regional market, would require a slash down of the new United Express fleet. Hence, the new United will be looking at reducing the number of operators where possible. This would likely be done as soon as the contracts expire.
Although some believe Republic Airlines contracts to be at risk to owing to development of Frontier ( Republic owned ), it is unlikely given that Frontier ironically helps United by competing with Southwest. As the contracts expire, consolidation expected.

Service Offering

Photo Sergey Rimsha/Airliners.net

A significant change is not expected on product offerings. Although in the long-term, the airline might move to a three class service. This could include all the four classes – First, Business, Premium Economy and Economy – but with only three classes on a given flight. This could be beneficial to the airline as First class has a fast decreasing demand. Increasing the Premium Economy section should help the new United to increase yields.
Channel 9 offered on United has been a favourite for many aviation enthusiasts, and so does LiveTV on Continental for many passengers. These two services are likely to remain in service, seperately, in the short term – although their future is uncertain at the moment.
It will take around an year in the minimum to consolidate and unificate all service offerings.

Passengers

Passengers will get better connections, and possibly a better service. The increased connectivity resulting from the merger will be very attractive to business travelers.
Although many medias are claiming a fare hike should be expected, this will not always be true. New United will always have to compete with others in the market, and hence a slight fare increase could take place almost always only in a market where there is a monopoly to United.

Frequent Flyer Programmes

Both airlines will continue to operate their Frequent Flyer Programmes independetly until the merger closes, in late 2010 or early 2011. After this, a new frequent flyer programme consisting of of features from both existing programmes will be introduced.
Miles in both programmes will continue to be valid, at least till the new programme is introduced and members will continue to have access to both Red Carpet Club and Presidents Club.

Alliance
Although there will not be a significant effect to alliances, as both Continental and United will stay same in size as before. Nevertheless, this merger would still pose a threat to both of the other two alliances – SkyTeam and oneWorld, with oneWorld set to be the worst affected.
Already in a globally weak position, oneWorld will suffer in the U.S market by having a smaller U.S member ( American Airlines ) in contrast to Star and SkyTeam members. oneWorld’s should now pay its attention in increasing the rest of its global portfolio rather than U.S, as it is unlikely American will grow to the U.S’s market leading position.

Competitors

The creation of the World’s largest airline is sure to give a serious to competition to all the airlines. However, the airline to suffer the most from this deal would be American Airlines.
With Delta already being a bigger airline, and now United turning into the largest – this might make one to think that American will have to merge as well. Although such a merger could bring economies of scale it begs the question of whom to merge with. The only remaining major international carrier in the U.S is US Airways – with whom, merging will not bring American Airlines enough benefits to transform itself into a leading competitive position.
In this market landscape, American’s best solution seems to be turning itself into the ‘best’ instead of the ‘biggest’. U.S airline industry has long been desperate for a quality airline which would not nickel and dime its passengers. To achieve this, American will need to upgrade its product and make its service offering more premium for the required markets, which will help increase the yield. AA should also consider offering a service with less-frills for certain markets, thus captivating the lower end of the market. Excelling in service standards is certainly the only way left for AA to differentiate itself and achieve a profit in this new market landscape.

The outlook
Together Continental and United will fly around 144 million passengers annually to 370 destinations in 59 countries. The two will have around $29 billion annual revenues with a cash balance of around $7.4 billions.
Continental shareholders will receive 1.05 shares of United common stock for each Continental common share they own. United shareholders would own approximately 55% of the company with Continental shareholders owning around 45%.
With a healthy financial position, the new United seem to could only get better. Consolidation process and costs will remain in effect for around 3 years. The already in place Antitrust-Immunity agreements between the two carriers should help make this a smooth merger. A streamlined approach could bring wonderful results out of this merger. There cannot be two better carriers to merge. A well streamlined approach. If everything is done right, this could be the beginning of yet another American global airline champion, after a very long break.

And, we will not miss the Continental name. There’s already Continental Airways, a low cost carrier from Russia.

Interesting Facts

World’s largest
Th largest 777
Th largest 767
Th largest 757

P.S: Livery – This is just my opinion. But I feel that this livery will only be a placeholder and will not really be painted on aircraft. All the signs point to the fact that no changes will take place until the merger is closed ( in simple terms, till the CO code is phased out and all assets are legally United ). Which should be more or less the same for the livery. This livery seems to be carrying a Continental feeling in order to make the merger a smooth one public-relations wise and to possibly avoid any backlash from the current Continental employees. A fresh branding and a livery will likely come out once the transition is finished. After all, let’s be honest, which sane modern branding unit will design such a retro livery ? At least, let’s keep fingers crossed, to see a better livery.

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Disclaimer : As of this writing nothing about this merger is officially approved and this author has used his best efforts in collecting and publishing most accurate details. But it does not warrant that the information contained in this article is complete or accurate and thus does not assume and hereby disclaims, liability to any person or entity for any loss or damage caused by this article. This article may not be reproduced or copied in whole by any means without the express permission of the author. Fair use excerpts for online publishing is freely allowed with a link to this article required.