The chief executives of Continental and United airlines suggested corporate travel buyers would benefit from their proposed merger, but travel management pundits were not so sure, The Beatreported Monday.
According to United CEO Glenn Tilton, who would become non-executive chairman of United Continental Holdings Inc. assuming shareholder and regulatory approvals, "The two happiest groups of employees in the two companies today are the corporate sales organizations. Wouldn't you like to be making those sales calls today?" The merged company's would-be CEO Jeff Smisek said: "We will be very attractive to corporate customers, and that attractiveness will be sticky, because we will provide the best scope, scale and product in the industry." He also said that "a single-carrier network is very attractive to high-yield corporate customers."
Any large-scale merger in the airline industry can be expected to reduce capacity and therefore push airfares higher. J.P. Morgan analysts last week wrote that they assume the combined airline would make an 8 percent capacity reduction. UBS analysts this week said they'd "be surprised" if cuts "weren't approaching 10 percent of combined domestic capacity," which would represent 2 percent of industry capacity and be "good news for all of the major airlines."
But United and Continental executives would not comment on the degree of capacity cuts they expect to make. The carriers said they would "continue to serve all the communities each carrier currently serves" through a combined network encompassing 370 destinations in 59 countries, including 10 U.S. hubs.
In any event, the impact on travel managers will not be determined by overall capacity numbers or the sheer number of destinations served; the effects will be case by case and depend on each organization's travel patterns, noted consultants. Some buyers could see their negotiated deals grow in scope, with associated discounts on more routes providing additional savings. In other cases, the loss of a competitor in certain markets could cause complications to the detriment of preferred carrier programs.
"The airlines always assume that everybody has just one preferred carrier," said Advito vice president of business solutions Bob Brindley, "so through merger or joint venture or alliance you increase the size of that carrier and they cover more of your program. In reality, other than for smaller clients, it doesn't work that way. As more consolidation happens, there are more challenges from a decision-making perspective because the corporate client will have less flexibility to really fine-tune their program to more specifically meet their needs."
"If you are sitting in a hub market, chances are it is going to be much harder to bring in secondary players to fill in some of the gaps in a program," said Dale Eastlund, senior director of CWT Solutions Group. "If you are sitting in a competitive marketplace, it may be easier.
"When you have just three major players, each of them is always looking to take the other players out of a program," Eastlund continued. "Having four, five or six carriers in a program in North America may be much more challenging in today's environment. As there is consolidation and fewer suppliers to work with, it does become more important when suppliers are looking for greater performance on contracts. It gives them some leverage with the buyers to say you need to be performing on what we are giving you."
United and Continental already are working toward a joint venture on transatlantic operations (with Air Canada and Lufthansa), and mutually enjoy antitrust immunity with other European Star Alliance partners Austrian, bmi, Lot Polish, SAS, Swiss and TAP. Therefore, from United's and Continental's perspectives, "most of the benefit of the merger would come from domestic and transpacific," said Prashanth Kuchibhotla, director of American Express Business Travel Advisory Services in EMEA. In the domestic market in particular, he added, there "could be some negative implications for buyers," particularly in hub-to-hub markets where the two airlines offer overlapping service, like Newark-Los Angeles, Newark-San Francisco and Denver-Houston.
Some corporate buyers would be challenged to not only maintain cost savings from preferred agreements but also solid relationships with airline account managers. Continental has a well-respected corporate culture, comparatively calm employee relations and strong relationships with big buyers, which United would want to leverage. "Continental would have to work hard to keep their healthy business culture at the forefront," said HRG North America CEO Tom Gleason.
Smisek acknowledged that "there will be people who will lose their jobs" at each carrier's headquarters as "you eliminate duplicative functions." He did not specify how corporate sales teams would be reorganized. Officials said the combined company's management would include "an equitable and balanced selection of executives from each company, with the intention that each company will contribute roughly equal numbers."
Execs Eye Fourth Quarter For Closing
The Continental-United deal was announced Monday but widely anticipated last week and foreshadowed in 2008 when the companies came close to a merger agreement before Continental settled instead for a joint venture and inclusion in Star Alliance. The all-stock deal would create the world's largest carrier, leapfrogging Delta, and could trigger more consolidation resulting in just three remaining U.S. hub-and-spoke network carriers. Continental and United officials said the deal would be presented to shareholders in September and estimated a fourth-quarter closing.
Called United Airlines, the new entity would be headquartered in Chicago, with "a significant presence" in Houston. "The marketing brand will be a combination of the brands of both companies," according to the companies. Equity of the combined company would be $8 billion, of which United shareholders would own about 55 percent and Continental shareholders would own about 45 percent.
Executives expect annual merger synergies of $1 billion to $1.2 billion by 2013, including as much as $900 million in incremental annual revenues made possible by "expanded customer options resulting from the greater scope and scale of the network."
But a combination "results in 13 nonstop overlaps, 11 of which would be reduced to monopoly or duopoly status," according to J.P. Morgan analysts. "This compares to 12 nonstop overlaps for Delta-Northwest, seven of which emerged as highly concentrated." They listed the nonstop overlap routes as: Cleveland to Chicago, Denver and Washington; Denver to Houston and Newark; Newark to Chicago, San Francisco and Washington; Los Angeles to Honolulu and Maui; and Houston to Chicago, San Francisco and Washington.
Speaking at the Phoenix Aviation Symposium last week, U.S. Department of Transportation assistant secretary for aviation and international affairs Susan Kurland said, "From a DOT perspective, we believe competition is important to consumers, but it will be DOJ that will be the decision maker. We'll provide our analysis."
J.P. Morgan ascribed a "75 percent likelihood" of regulatory approval. UBS said there is "high probability" of DOJ approval.
Of course, labor groups will have their say. Attempting to reconcile union contracts is an inherent danger in airline consolidation, as is achieving a seamless integration without inconveniencing customers. Given the work required to combine operations, fleets, customer service programs and countless other systems and services, disruptive mergers in the industry's history far outnumber smooth ones.
To ease the process, Continental and United immediately intend to create a transition team to "develop a specific integration plan." They may take some cues from the Delta-Northwest merger in attempt to replicate some of the successes.
If that integration offers a blueprint, competitive detriments were fairly isolated when combining Delta's and Northwest's complementary route systems, according to sources. They said many accounts maintained or even increased discount levels--and secured discounts on more routes--as more of their volume fell under the purview of a single provider. "There was a little bit of hub competition for some flow traffic, but overall that was a relatively minor negative impact for corporate clients," Brindley said.