Last Friday, United (UAL: Charts, News, Offers) and Continental Airlines completed their merger, which has created the world’s largest airline. Once there were five major international American carriers, and now following Delta’s purchase of Northwest and this current merger,only three remain – United Continental, American (AMR: Charts, News, Offers) and Delta (DAL: Charts, News, Offers). For now, the two companies will remain separate in check-in and frequent flyer operations, combining by Spring of 2012, when the Continental brand will be replaced by a newly branded United Airlines. Continental will close its headquarters in Houston and expand operations in United Airlines’ offices in Chicago. Management has painted a rosy picture of growth by 2013, but the path ahead remains foggy. Will investors need to buckle up and brace for some turbulence as these two airline giants become one?
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Combined, United Airlines and Continental carried 8.7 percent more passengers than Delta, up to August of this year. The newly combined airline would offer 5,800 departures daily, edging out Delta’s 5,715. By doubling its route map overnight, United Continental hopes to attract more corporate business travelers, whom favor non-stop, one carrier flights. The two companies had a total net revenue for $28 billion last year. The new company forecasts $1.2 billion in total new revenue and cost savings from synergies by 2013. The bad news for travelers, however, is that airfare is widely expected to rise, due to a decrease in competition, a rise in oil prices, a fickle economy, and the continued implementation of extra fees such as luggage and meal charges.
Several immediate growing pains await the new United Airlines. Firstly, union contracts must be re-negotiated within a year for the company to obtain a single operating certificate from the Federal Aviation Administration. United and Continental pilots are members of the same union, but have different aircraft size limitations for regional carriers. Ground crew and flight attendants are from different unions. Considering that merging two companies together usually results in job losses due to overlapping redundancies, this could lead to problems down the road for the company, especially considering airline unions’ past conflicts with the industry. There are many former United employees who are waiting on unclaimed pay from the company’s three-year bankruptcy. Secondly, if the company gets past the unions, it must consider the estimated $400 million in extra labor costs of integrating the two companies’ workforces and resources. These factors make its initial target of an additional $1.2 billion by 2013 a bit overly optimistic. In fact, analysts have cited Delta’s initial claim of $1.5 billion in similar revenue after merging with Northwest, which it did not achieve, instead only maintaining average margins matching the rest of the industry.
Moving forward, the company will be able to raise last-minute business fares as the economy improves, due to an increase in general spending power from both individuals and their companies. It will have less success raising leisure tickets – those purchased weeks and months in advance for planned holidays, due to a still elevated level of consumer discretion. United and its industry peers are still charging less fares per mile than before, due to the 2008-2009 recession, discretionary spending, competitive pricing and a low-cost fuel environment. The aforementioned attempts to offset the weak core earnings through baggage and meal fees has proved unpopular but has not adversely impacted the overall bottom line.
The former CEO of Continental, Jeff Smisek, has become the CEO of the newly combined company, and has been reported to receive an annual salary of $975,000. He has replaced Glenn Tilton, the former CEO of United Airlines. Smisek said of the challenges facing him with the massive merger, “If you are an airline geek, it doesn’t get any better than this: bringing these two carriers together. They are the perfect marriage, the perfect fit. I think we’re creating a tremendous carrier here.” 56-year old Smisek has a strong reputation from his miraculous turnaround of Continental Airlines, and has been described as a “whip-smart change agent” by journalists and analysts alike. If he can get past the minefield of airline union negotiations and successfully bring the disgruntled United employees to his side quickly, he may very well be able to trump pessimism about his $1.2 billion claim and make UAL an attractive clean investment to prospective investors. While it is hard to peg a perfect estimate on the stock price, due to the inevitable shakeups on both sides and the change in business structure, the newly created largest airline in the world has gotten off to a promising start.
Other News About UAL
United Airlines’ new CEO has lofty goals and quite a reputation – The challenges that lie ahead for the new CEO
Making sense of the United-Continental merger – Questions and answers about the merger. – (UAL: Charts, News, Offers)
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
