Predictions for a Continental-United Merger

I’ve been chatting with a bunch of media surrounding the expected United-Continental merger, being considered by the Continental board tomorrow.

Lucky offered his thoughts on Thursday. Here’s his money quote:

If you’re a mileage runner you shouldn’t be looking forward to this merger, plain and simple. Part of what makes United “profitable” as a customer is what a mismanaged airline they are and how poorly so many of their policies are thought out. If you complain that your seatmate farted, you’ll get a $200 electronic certificate good for future travel.

And that’s certainly true, United is pretty dysfunctional and customers who understand their system have lone done well by them. Ultimately some of the more rewarding quirks of United will likely ultimately go away in a post-merger world.

But somehow I don’t think United’s perspective on the merger is that finally they’ll get someone competent to run the airline! And most of the supposed benefits are already in place. They’re already frequent flyer partners, there few new benefits for customers there. And they already have anti-trust immunity to coordinate schedules and pricing. That leaves downsizing combined fleet and routes as the sole real benefit, which in my opinion is outweighed by the cost of integrating workforces and technology.

My bottom-line is that I have to believe United wants this merger, and likely underprices themselves to get it, because United’s management sees it as a payday. It’s several times been reported that Tilton gets a $9 million personal payout if he leaves within two years of change of control of the airline. And it wouldn’t surprise me if management got an ownership stake in the combined company as a payoff as well. We’ll see what the details look like.

My guess is to why this might go forward now — with US Airways pulling out of the merger sweepstakes, Tilton saw this as his last best chance. So he became willing to recede to the role of nonexecutive Chairman and turn the reins of a merged company over to Jeff Smisek. And without competition to partner up with United the price likely drops as well.

On the big questions, much of the forward facing merger work has already been done, and a merger is hardly required.

  • When Continental joined Star, frequent flyers could both earn miles (and status miles) on each others’ airlines and also redeem their miles on the other carrier as well.

  • They aligned their frequent flyer award charts so that their “zones” match and that mileage pricing matches

  • United and Continental announced months ago reciprocal upgrades (united elites would be upgraded on Continental and vice versa) and that Continental elites would have complimentary access to Economy Plus seating on United, something United does not extend to any of its other partners. These have long been slated to go into effect over the summer.

  • United followed Continental’s lead in restructuring international upgrades to permit them on any fare but with a cash co-pay (they used to allow international upgrades on higher priced coach fares only).

  • United’s reconfiguration of its 777s even go from 2-5-2 seating to 3-3-3 seating in coach, matching Continental

    But there are also real open questions in a Continental – United merger.

  • United flies 3 cabins internationally, Continental offers business class but not first. Will international first class survive? My guess is not, but that it’ll take awhile to go away — United just finished updating their 747 and 767 interiors and they’re now doing the 777s.

  • United offers Economy Plus in coach, even on a large number of United Express regional jet services. Continental has no similar offering. Will Economy plus survive? Like Lucky, I’d have to think so. It’s so heavily branded, they make money on upsells, and it would be a huge PR negative to take it away. But then American used to offer “More Room Throughout Coach” and they reverted to tighter coach seating.

  • Starnet blocking. United is the only member of the Star Alliance that ‘blocks’ award seats that their partners are offering when they don’t want to pay for the seats. So United often tells its members that a Lufthansa or Swiss award seat that you could book with US Airways or Continental miles “isn’t available.” Will partner award blocking continue? To me, that’s the frequent flyer program make-or-break in this merger. Right now Continental doesn’t block partner awards. They pledged not to when they joined Star Alliance. And as a result, Continental Onepass miles are much more valuable than United Mileage Plus miles. United Mileage Plus will certainly be the surviving program… will Continental’s rules survive, or will Continental miles become devalued in merging with Mileage Plus? Lucky thinks Starnet blocking goes away, but the architecture of Mileage Plus will remain, so I’m not so sure. Removing Starnet blocking will mean higher costs at a time that the combined entity is looking to lower costs. I also assume that Continental’s more generous award routing (stopover and an open jaw, not just one or the other) goes away, while United’s one-way awards survive.

    So what happens next?

    If the two companies merge, little will change right away. We’ll probably see something along the lines of gradual integration and I’m hopeful that Continental’s IT architecture survives, that their award rules survive even though everything gets the United and Mileage Plus names, and even that there remains Continental’s emphasis on US call centers (but that those go 24 hours for award booking).

    I look forward to being able to move miles back and forth between the two programs, the way that Delta and Northwest allowed and US Airways and American West allowed in their transitions. Of course that would drive up costs, with those ‘in the know’ booking all their awards with United miles moved over to the Continental Onepass program.

    Since the merger only makes sense if they wring cost savings out of their combined operations, they need to shut down excess capacity. There’s little question that Cleveland becomes even more de-emphasized than it already is, given its proximity to Chicago. The city will need to survive strictly on the capacity that its own arrivals and departures can sustain.

    The same logic holds for Washington-Dulles, though the DC metro area will support more traffic than Cleveland. It hardly makes sense to keep both Dulles and Newark as transatlantic gateways, and it makes no sense to de-emphasize Newark. So I’d expect those flights servicing the DC market primarily, especially government-to-government business to remain. But less feed.

    Finally, I was a guest recording the Upgrd.com podcast this past Thursday (presumably it’ll be posted this week) and I speculated “who is left?” for mergers. American and US Airways could begin talking, though (and I’m no expert in the business of the airline industry) I’ve always assumed that American remains a bankruptcy waiting to happen and US Airways has no cash. Though one imagines that a stock-for-stock deal could still happen. And even that although Alaska has been getting closer to Delta in spite of the airline’s partnership with American, that American could buy them as well. That would leave them strong in the Pacific Northwest and the Southeast to complement their Los Angeles, Dallas, Chicago, Miami, and New York operations. And the only real overlap that would need to be ‘rationalized’ would be the US Airways Northeastern operations, already on the decline.

    Update: Two more predictions.

    First, I agree with Lucky that the combined airline gets more discounted first class fares a la Continental, which makes upgrading harder. All the more reason to be a top tier elite if anything at all.

    Second, I’d predict that we finally see complimentary alcoholic beverages in United’s Red Carpet Clubs. Currently Continental, Delta, US Airways, and Alaska all offer complimentary beer and wine at a minimum. United and American are the sole carriers charging for the house offerings of those. A Continental-managed United standardizes their complimentary offerings, probably adopts Contnental’s model of charging for premium brands. So much for combining to lower costs! Meanwhile, American will not stand alone — their AAdmiral’s Clubs will follow suit, for fear of losing business especially out of Chicago.

  • About Gary Leff

    Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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    1. IAD handles a huge amount of O/D international traffic, not just the US Government or the many foreign Embassies, but also paid premium customers from numerous other places (e.g. the OAS, World Bank, IMF, Fortune 500 HQs). UA finds the trans-Atlantic gateway operation at IAD very profitable. Given the existing congestion at NYC, it isn’t obvious that it is either practical or profitable for a merged airline to significantly reduce the international traffic to/from IAD by moving it to EWR. Both the NH and UA flights IAD::NRT are routinely full, have lots of paid premium passengers, and are consistently profitable. So those aren’t likely to disappear either.

      IAD also has huge amounts of O/D domestic traffic, not just business and government travellers based in metro DC, but also thousands of visitors to the nation’s capitol. Since DCA has significant range restrictions by law and rule, most of the western flights operate to/from IAD.

      Obviously some shuffling of aircraft types and route frequencies IS likely to happen, at virtually every airport, with any airline merger. So IAD might have 2-3 daily non-stops to LHR as compared with the 3-4 that occur IAD-LHR on UA today. Similarly, some frequencies on some routes might shift from EWR to IAD to maximise revenue/profit.

      Cleveland is a rather different case, because it has little O/D traffic, in great contrast to IAD. Cleveland is likely to see significant reductions, with some of the Cleveland traffic moving in to IAD or out to ORD.

      For myself, I just hope the merged airline upgrades all international business seats on all aircraft types to UA’s new horizontal flat beds with AVOD and iPod support. 🙂

    2. @EWR-Flyer — we don’t actually disagree that much, except for the part about IAD being “very profitable.” There’s a reason why killing the IAD hub was on the table during UA’s bankruptcy.

      IAD flights will need to survive more on the basis of O/D traffic than on connecting traffic is my argument, and so many flights will remain but certainly not as many as today.

      And my reference to government travel wasn’t intended to mean US government employees, but international government and government-sponsored travel, which includes World Bank and IMF. In other words, those very O/D passengers you’re referring to.

      And while there’s plenty of tourists coming to DC at specific times of year, that’s not the lucrative traffic that makes a hub. Which airline is it that’s based at MCO, exactly?

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