Continental rejects United as merger partner

photo by Drewski2112
Well, it was a bit of a surprise. After the linkup between Delta and Northwest a few weeks ago, many (myself included) expected to see continued industry consolidation. And a merger between United and Continental was seen as a likely one; rumors floating around pointed to an announcement as soon as this week. The merger would have created an airline that might rival Delta/Northwest in size, as well as international coverage (United's strong Asia presence would fit nicely with Continental's extensive European route network).

But last week, a little something occurred that made Continental think twice: United posted a $542 million loss for the first quarter of 2008. Even in the airline industry, a half billion dollar loss is pretty big, and it's a sign of an ailing airline. United's huge loss scared away Continental, which announced on Sunday night that it was abandoning merger talks with United.

The airline made the announcement in a letter to employees from CEO Larry Kellner and President Jeff Smisek. "We want you to know that our Board of Directors met today and has unanimously supported management’s recommendation that, in the current industry environment, the best course for Continental is to not merge with another airline at this time," it read... The Board very carefully considered all the risks and benefits of a merger with another airline, and determined that the risks of a merger at this time outweigh the potential rewards, as compared to Continental’s prospects on a standalone basis." The letter - which never identified United Airlines by name - went on to say that the airline will "continue to review potential alliances and our membership in SkyTeam. We are considering alternatives to SkyTeam as we carefully evaluate which major global alliance will be best for Continental over the long term."

Continental's decision is certainly a setback for United, which has been looking to merger for some time now. I don't think that the decision to not merge was arrived at easily, since there could have been some benefits from linking with United. But the folks over at Continental are betting that a merger with United, which is racking up heavy losses, could also drag them down as well. Even though Continental definitely wants a better Asian route network - and they could have obtained it through a merger with United - it might be able to get it another way. If United files for bankruptcy again, Continental might be able to grab the Asian routes by themselves, without having to deal with United's poor financial shape.

Continental has also reportedly been in talks about forming a three-way alliance with American Airlines and British Airways, although, from an anti-trust standpoint, this might be a bit difficult.
And as for United - well, this is certainly bad news. CEO Glenn Tilton tried to remain upbeat in a statement released Sunday night: "Our strategy is consistent. Consolidation is underway - ensuring you have the right partner is everything. We will pursue all options to ensure a strong, sustainable future for our airline and will not shy away from the tough choices necessary to create value for our shareholders and benefit our employees and customers." A United-US Airways merger might happen, but I don't know if it will do much good. Both airlines are still dealing with their respective trips to bankruptcy court, and I don't think that a merger between them will solve anything.


Jeffrey Sigmon said...

Nice post. The year is not half way over and I can't keep track of how many merger attempts and bankruptcies have happened in the aviation world. I guess we'll see what happens with US Air and UA: and between AA and CAL.

Ryan Dubach said...

Continental made a good decision. United has gone down hill and in the wake of good customer service airlines popping up it is looking bleak for United. This is my latest experience with United and it is safe to say I am an unhappy customer. I hope Continental does not re-consider as it would be a shame to lose another carrier I might consider flying.

I have just finished 3 weeks of hell with United. I booked three flights with united in the last three weeks and every one of them has had a problem. The timeline:

May 17th: I booked two flights, one for my wife and one for myself. I used reward points for my ticket to depart on June 10th, and I purchased hers to depart on June 11th. We shared the return flight.

May 19th: I noticed my reward points had not decreased and checked my credit card statement to see that the $7.50 booking fee had not been charged. With my May 17th confirmation in hand I called the ticketing agents and spent 1.5 hours getting it all worked out. Apparently my reservation had been canceled by someone or something other than myself. My favorite part, and quite unbeknownst to myself, united charged me a $25 phone processing charge to re-book a flight I booked on the internet two days earlier. Audacious, I think so.

May 30th: My wife had a flight to San Francisco through work scheduled to depart at 7am. At 5am my wife received a voicemail from a call that happened at 4am informing us that the flight had been canceled due to "Maintenance Issues." Completely speculation, but it sounded more like, "The price of gas just jumped $11/barrel and the flight isn't even a quarter full." The only option on united was to re-route, which unfortunately landed her there about 1 hour after her meeting. I had to get up while she was getting ready and call Southwest (a very reliable and customer friendly airline) to book her on one of their flights. United informed her that she can not request a refund until her "flight had expired."

June 2: My wife calls United to be issued a refund and is told that she opted out of her flight by choice and united was not obligated to refund her anything. This did not sit very well so after asking to speak to the customer representative's manager we got it worked out and IF the canceled flight qualifies for a refund we will be issued a credit in 3-4 months (they will probably be bankrupt again by that time).

June 5: Remember that flight my wife and I booked way back on May 17th? The one where hers was booked alright and mine was canceled? Well, after paying meticulous attention to the times we are flying as she could not take off the 11th for work reasons, her 10:30pm flight was actually scheduled for 8:54am. I called United and the reservation specialist informed me that in order to change the flight at this point we would be charged a transaction fee of $150 and the fare difference of $550. Just to recap, this is not something that I did and I don't find it very coincidental that this is the same night that my flight was canceled by the system after booking it. I got the run around and eventually talked to woman named Sara Gilmore (employee number V79) who claimed that she was the highest person I could speak with. I explained to her the situation again to no avail.

Sara: I am the highest manager on shift.

Ryan: Just so we are clear; I booked to flights on the 17th of May. Some system generated problem occurred and my flight was canceled and her flight times were changed. This was not my fault but you are going to charge me $700 because of something that is United's fault?

Sara: Yes.

I eventually called the "place where I can file a complaint" and was told that they can not do anything until the date of the flight has past. They also informed me that I need to talk to the reservations desk with any current complaints. This was all before I discovered the $25 telephone processing fee for a reservation booked online that was canceled by United.

I have flown United for nearly 10 years now. I think it is safe to say that United has gone down the tubes. I am canceling my rewards plan with points still on it and I refuse to fly United in any circumstance

jim said...

I just don`t understand why Airlines don`t learn from the Freight industry and charge by the pound for passengers. We will all travel more comfortable with the fatties off the planes anyways, it will force people that want to travel cheap to diet, it will reduce health bills due to improved obesity stats.. its win win situation.

it will also teach those passengers that pack like they are moving cross country when they fly for a 2 day trip.
You pack heavy ?
You pay heavy !!
You keep in shape, you pack light ?
You travel cheap !!!!
simple ..

Jeffrey said...

I've spent a lot of time thinking about airline mergers, and most of them just don't make sense. Unless they have a lot of duplicate routes, the airlines won't see a lot of savings. Fleet consolidation will increase maintenance expenses and labor costs inevitably go up.

The source of real savings comes from reducing routes and serving the same number of customers with fewer flights. However, these mergers would struggle with the Department of Justice.

Also, the weight of passengers and cargo makes up a tiny percentage of a plane's weight at takeoff. Fuel prices need to be distributed across the board. Bag surcharges and "by the pound" flying ignore the real issue of improper pricing systems.