Airline Weekly - May 10, 2010
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Airline Weekly - May 10, 2010

What the Merger Means: United and Continental make their tie-up official. What now?

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Cover Story

What the Merger Means: United and Continental make their tie-up official. What now?

Last week, America’s Big Five moved to become the Big Four. United and Continental, airlines number three and four by size, agreed to create number one, taking United’s name and chairman but Continental’s branding and chief executive. Assuming the all-stock deal is finalized, United’s shareholders will own 55% of the combined company while Continental’s will own the other 45%. A new management team, based in Chicago, will consist of executives from both carriers.

Why now? Because macroeconomic conditions are far better today than when the two carriers nearly announced a deal in early 2008. Fuel prices are lower, credit markets are trending positively and the economy is growing again. In addition, the Delta-Northwest merger provided a template for success. And finally, Continental was sparked into action after learning that United was talking to what Jeff Smisek now-famously called the “ugly girl:” US Airways.

The new airline predicts about $1b to $1.2b in annual synergies by 2013, with about three quarters of this achieved by 2012. About three quarters of the total will come from revenue synergies, with the rest coming from cost synergies. The new United also expects “startup” consolidation costs amounting to $1.2b over three years, mostly tied to labor, IT integration, fleet integration and professional fees for lawyers, bankers and the like.

The revenue synergies, which are incremental to those already being harvested by existing cooperation between the two carriers, are easy enough to understand. Their combined network will be one of the world’s most comprehensive, covering all key domestic and international regions. That alone will help it win business from high-revenue corporate travelers, who generally don’t travel with LCCs. Their combined fleet will allow productive maneuvering of B747s and more B777s, for example, to the Newark hub. Continental itself, after all, only has 20 B777s and sub-optimally relies chiefly on smaller B767s and B757s for its international service. (Similar moves at Delta have been an important and probably underappreciated benefit of its merger: swapping A330s and B767s between two routes can be enough to turn them both from losses to profits.) The combined company will have 72 B777s, and a lot more B767s and B757s as well. A joint order book for 50 B787s, 25 A350s and 50 B737-NG narrowbodies is also impressive. At least equally important will be the opportunity to optimize the regional fleet, which for Continental’s part relies too heavily on uneconomical 50-seat planes.

Add to this a giant frequent flier program with 91m members, compared to just 74m for Delta. That alone will keep JP Morgan Chase, which conveniently partners on co-branded credit cards with both carriers, from ever letting the airline run out of cash. The giant’s importance to lenders, aircraft manufacturers and distributors, too, will make... (471 of 1887 words)

Also Inside this Issue:

It was a wild week for the world and a wild week for the world’s airline industry. A U.K. election, a stock market plunge, riots in Greece, tumbling oil prices and more ash cloud cancellations were the backdrop for a $3b merger between United and Continental, one that creates the world’s largest airline.

If that weren’t enough drama, Virgin Blue and Air New Zealand announced a tight partnership, LAN moved to enter the Colombia market and the DOT made fateful decisions on Tokyo Haneda rights and the proposed Delta-US Airways slots swap. A number of carriers, all the while, reported Q1 earnings.

Among these reporting carriers were Lufthansa, which had a rough quarter but sees better times ahead, and Air Canada, which is still losing money but is much healthier now than it was a year ago. LCCs Gol, WestJet and Air Arabia had profitable quarters as did Copa, not a classic “LCC” but a carrier with low costs.

Looking back at the fourth quarter of last year, the airline politicians love to hate seems to be one that passengers love to fly. For all the controversies, Spirit Airlines made a lot of money.

But on the labor front, Spirit faces a potential pilot strike. Also facing unresolved labor pains are BA and Lufthansa. But American, on the other hand, made progress by reaching a tentative new contract with mechanics.

Labor relations also happen to be a critical factor in determining what becomes of the grand United-Continental merger. Will the new giant, assuming regulators allow its formation, create enough new revenues to give its workers what they want?  

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