A few thoughts on the United-Continental merger

I thought I'd share a few thoughts on the just-announced United-Continental merger. There's a lot out there about the terms of the deal and other specifics, but just to recap, the $3 billion merger (which has yet to be officially approved) would create the world's largest airline. The airline would be based in Chicago and keep the United name (but the Continental logo) and would be led by Jeff Smisek, the current Continental CEO.

(Yes, that is a 787.)

Here we see the consummation of Glenn Tilton's dream - for several years now, nearly every other word out of his mouth has been either "merger" or "consolidation." And it's a great fit, network-wise: there's little route overlap, which should help the deal get anti-trust approval pretty easily. (For another perspective, check out Dan Webb's post at Things in the Sky.)

But I'm going to focus on one aspect of the merger here: branding. There's a picture of Jeff Smisek and Glenn Tilton shaking hands in front of the new United logo, which is nothing more than the Continental logo with "United" in there instead. And the paint job would be exactly the same as Continental's - again, with the name "United."

Maybe it's just me, but it looks pretty bad. I've come to associate the United name with that familiar block typeface and the "tulip" logo, which has been around for almost 35 years now. I can see that perhaps management wants to appease Continental employees concerned with the disappearance of their name. And this would certainly be a relatively low-maintenance rebranding, too; just replace the word "Continental" with "United" everywhere and you're done. Apart from the fact that United's the one that's technically doing the buying here (despite the 'merger of equals' talk), one of the reasons that the United name is the one that's staying is because it has a stronger global reputation.

I'm hoping that once the merger gets final approval, some more time and effort goes into designing a better brand - if they're going to keep the United name, they should also keep the logo.

A British Airways-Iberia merger: what does it change?

The fact that Iberia and British Airways are planning to merge isn't news by now. The deal's going to mean that the combined airlines become the third-largest airline group (behind Air France-KLM and Lufthansa), and there's the usual talk of synergies and cost savings, etc. We are laying the foundations of what will be one of the most important airlines in the world, a real global airline, said Iberia CEO Antonio Vázquez. I believe that, thanks to this transaction, which is the most important in the European airline industry in recent years, we are more prepared than ever to face future challenges. Meanwhile, British Airways CEO Willie Walsh has said that the merger will create a strong European airline well able to compete in the 21st century. Both airlines will retain their brands and heritage while achieving significant synergies as a combined force.

Sound familiar? Check out what the CEOs of Northwest and Delta had to say back in 2008. And I'm sure it's been said many times before. But besides giving graphic artists the chance to create some hybrid BA-Iberia tails, what does the deal really do? What do these types of mergers do nowadays, anyway? Sure, the deal will help both airlines stave off the other two big airline groups in Europe, but will it effectively deal with BA's oft-publicized woes? Or, as one comment on the BBC's website asked:

Will the cost of jet fuel be any cheaper if they merge? Will the service be better? Will things go back to the golden days of air travel when you could take just about all the luggage you wanted for free, and the onboard meals where for free as well as the soft drinks? Will there be more legroom in economy class? Will we be treated slightly better than cattle? Will they ban cell phone chatter and lap top tickering on planes - finally, thankfully? Will there be Peace and Quiet? No? Why merge?

Granted, no one's expecting the glory days of air travel to come back; nor does the merger have much to do with cell phone use or legroom, of course. But it did make me think about how airline CEOs sometimes talk about mergers as silver bullets - even if they don't really change much, as the BA-Iberia linkup will probably do.

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.

US Airways CEO mentions mergers

photo by caribb

In a letter sent to employees yesterday, US Airways CEO Doug Parker said that "airlines are going to have to make dramatic changes" if they want to survive. Although he said that he couldn't "comment on any specific discussions or transaction," he said that the media have suggested that US Airways is in merger talks with United and that American would make a good match as well. "Rest assured," said Parker, "if US Airways chooses to participate in any industry consolidation, we will do so because we believe it is the best interests of our employees and our airline."

Would US Airways be a good match for United, which has been seeking out merger partners? They already code-share (a benefit that the Delta/Northwest combination has), and US Airways has a strong presence in the Northeast and Southeast (two areas where United's route structure is weaker). But I don't see US Airways' route network as being as much of a plus for an airline like United, which needs more international routes. Of the six largest legacy carriers, US Airways has the smallest international route network. United might prefer a rumored merger with Continental to one with US Airways.

US Airways still has problems of its own, too, from its last merger (between US Airways and America West). And let's not forget that the last time United and US Airways tried to merge, it was rejected by the Justice Department on anti-trust grounds.

By the way, here's the original message sent out by Parker (posted on the US Aviation boards):

From: Corporate Communications
Sent: Wednesday, April 16, 2008 8:36 AM
To: Corporate Communications
Subject: USNews Now: An Important Message from CEO Doug Parker
Importance: High

An Important Message from CEO Doug Parker

April 16, 2008

Dear Fellow Employees,

With the recent news of a potential Delta/Northwest merger, analysts and media are speculating about the next potential combination. While we had hoped to remain on the sidelines of this speculation, today’s Wall Street Journal suggests we may be in merger talks with United and another article in the Dallas Morning News suggests we might make a good merger partner for American.

While I can’t comment on any specific discussions or transaction I certainly didn’t want you to hear this speculation without hearing directly from me about what this might mean for US Airways.

Most of you know my views on consolidation and those have not changed. Our industry is far too fragmented and consolidation, if done properly, could result in a much healthier industry which would be good for our employees, our customers and the communities we serve. Rest assured if US Airways chooses to participate in any industry consolidation, we will do so because we believe it is the best interests of our employees and our airline.

Despite all of the challenges of merging two airlines, we are a much stronger company today as a result of the merger of US Airways and America West. We posted the highest pre-tax margin of the big six airlines in 2006 and even with our operational challenges we posted the second highest pre-tax margin in 2007.

And we have an improving airline. We’ve made great strides with our operational improvement plan, including top three performances in on-time arrivals for three consecutive months. As we continue through 2008, we feel extremely good about our ability to continue to improve our operational performance relative to the industry.

But we can't ignore what's happening in the world around us. Oil has risen to over $113 per barrel and Wall Street is anticipating a recession that, if it happens, will lower all airline revenues. And the DL/NW combination potentially creates a formidable competitor. In that world, all airlines are going to have to make dramatic changes to their existing business models in order to be viable.

I know airline merger speculation can be distracting so for now, I encourage all of us to remain focused on running a great airline. Our work on the reliability, convenience and appearance initiatives continues and we are running an extremely reliable airline as a result. Whatever we do, we will always take great care to ensure the path we choose returns value to our shareholders and customers, and also provides long-term stability for our employees.

Thanks for all you do for our customers and keep up the great work.

Delta and Northwest announce merger

It's official: the long-anticipated merger of Delta Air Lines and Northwest Airlines has finally been announced. The combined carrier - already billed as "America's premier global airline", will be known as Delta and will be based in Atlanta. Delta CEO Richard Anderson would head up the new airline.

A press release by the airline touted the benefits of the merger; it "creates a company with a more resilient business model that is better able to withstand volatile fuel prices than either can on a standalone basis." The release went on to say that "the merged airline will maintain all hubs at Atlanta, Cincinnati, Detroit, Memphis, Minneapolis/St. Paul, New York-JFK, Salt Lake City, Amsterdam and Tokyo-Narita... Delta customers will benefit from Northwest’s extensive service to Asian markets and Northwest’s customers will have access to Delta’s strengths across the Caribbean, Latin America, Europe, the Middle East and Africa."

Of course, the merger still needs to clear regulatory hurdles, and there's always the issue of the pilots at both airlines, which haven't yet agreed on seniority. But if the merger goes off successfully, it will create the world's largest airline. Also, keep a look out for a United-Continental merger, which has been rumored to occur if a Delta-Northwest merger was announced - it could be announced very soon. (Although United has favored a merger for some time, Continental has said it would consider it only if a Delta-Northwest deal went through.) More details of the Delta-Northwest deal will be revealed tomorrow at a press conference featuring both CEOs in New York, but until then, check out the website that Delta set up about the merger.

I've also posted below the internal memo sent out to employees today at Delta, which sheds a bit more light on the merger process (click on the images to view them at full size):

Delta-Northwest, United-Continental mergers soon?

photo by Cubbie_n_Vegas

The Wall Street Journal is reporting that a merger deal between Delta Air Lines and Northwest Airlines could happen as soon as next week. Talks between the two were previously strained as the senior management of both carriers disagreed over whom would keep high-ranking management positions, but they have since come to an agreement.

As a result of Delta and Northwest's merger potential, merger discussions between United Airlines and Continental Airlines have also reportedly "grown more serious," said the article. United has proposed a merger with Continental before and has been turned down, but if Delta and Northwest announce a deal, Continental could change its mind very quickly and agree to merge with United, which has been actively looking for a merger partner for some time now.

An interesting point in all of these merger talks is Northwest's so-called "golden share" in Continental. This is basically some preferred stock that allows Northwest to abort a merger between Continental and another carrier. If Northwest and Delta do merger, however, Continental has the option to acquire the "golden share" for $100. Continental would be able to get the stock even if the Northwest-Delta deal later falls through.

The mergers raise a lot of inevitable questions - what types of aircraft will the combined operations operate (what will happen to Northwest's A330s)? Which hubs will stay open and which will close or be downscaled (Memphis, Cincinnati, etc.)? What international routes will be dropped or added? It's most likely that the answers to these questions will be worked out before the merger is announced (after all, it would be pretty stupid to merge first and then tackle those problems). As always, lots of things could happen. American Airlines, which is being left out of all of the "merger madness" at present, could intervene somehow. Labor unions or antitrust regulators could always prevent these mergers from going through (and with the size of these airlines, any mergers would get a high amount of scrutiny from the antitrust folks).

Delta moves toward merger talks with United, Northwest

photo by Franco Folini
Publish Post

Delta Air Lines, which has reportedly been interested in a merger for some time now, has requested permission from its board to start "formal" merger discussions with United Airlines and Northwest Airlines soon, with a plan to choose one of the airlines with which to merge.

In the last few years, Delta has carried opposing views on mergers: it exited Chapter 11 bankruptcy last year after successfully fighting off a hostile takeover proposal from US Airways. But soon after leaving bankruptcy, it started exploring its merger options, and has been the target of merger rumors before (such as this past November, with United Airlines). And with a stagnant economy and oil prices at nearly $100 a barrel, mergers might help relieve some of the pressure that the US airline industry is feeling right now.

A Delta-Northwest or Delta-United deal would probably create the world's largest airline (currently American). So which airline could it be? Back in November, Northwest was (and still is) seen as the most likely candidate, because the route structures of the two airlines has less overlap. And Delta CEO Richard Anderson has ties with Northwest, having worked there for 14 years and ultimately rising to the rank of Northwest CEO. But the main problem with a Delta-Northwest tie-up is the fact that two hubs - Delta's Cincinnati and Northwest's Memphis - would probably be shut down, due to their close proximity to each other. This might create trouble from both unions and politicians.

The possibility of a combined Delta-United has been raised before, and United management has been advocating industry consolidation for quite some time. But it will be some time before any merger plans become concrete, and even then, they can still fall apart quite easily. But this time, it appears that the unions - at least at Delta - are more supportive of the merger idea than they have been in the past. Lee Moak, chairman of the Delta pilot's union, said in a letter that “consolidation may indeed be at our door... We do not oppose consolidation, and may even determine that consolidation is desirable.”

United's "urge to merge"

The world of airline mergers has been buzzing since last week's report that United Airlines and Delta Airlines were being pushed by Pardus Capital Management (which owns a sizable stake in both airlines) to merge. Delta CEO Richard Anderson stated that "there have been no talks with United regarding any type of consolidation transaction and there are no such ongoing discussions." In a press release, Delta said that it "will not speculate on possible airline consolidation".

It's no secret that United has been shopping around for a merger partner for some time. They haven't bought any new planes in quite some time, and United has relatively thin profit margins and high debt.

That said, rumors have been flying for the last few years that United would find a merger partner. These partners have included Continental (which already said no) and Northwest (which wouldn't work out because the two airlines both have strong Midwest hubs) - almost everyone except American (a United-American merger couldn't happen because the combined airline would be too big). The latest to crop up on the aviation forums involves jetBlue, since the two airlines have complementary fleets/networks. United would use jetBlue as an opportunity to become a player again at JFK, which would tie in nicely with international feed from Star Alliance carriers and make it more competitive on the East Coast. And a United-jetBlue merger would also put an end to the fight at Washington-Dulles between the two airlines.

But a United-jetBlue merger isn't too likely, and any merger wouldn't be a cure-all fix for United. Even though United may be holding out on buying new planes to attract merger partners, they're going to need to upgrade eventually to keep up with competitors. And employee-management relations aren't very good, either. Merger or no merger, United really needs to address these issues (and others) if it wants to remain a viable competitor in the industry.

United: still looking to merge

United Airlines CFO Jake Brace recently said that his airline is still looking for a merger partner. He recently said that there are still airlines that United could merge with, but that it isn't looking to do a hostile take-over. He said that "consolidation is not something that one company can do in isolation. We don't believe that ... hostiles in the airline industry are very successful. Our belief is that you have to do something on a consensual basis." Evidently he was referring to the failed US Airways hostile takeover attempt of Delta.

Brace also said what United was looking for in a merger partner:

• an airline with a strong Atlantic network (like Continental or Delta). This is one of United's weaker areas.
• an airline with a southern hub (like Delta) so that it can increase its presence in the Caribbean and Latin America, which is its other main 'weaker area'.
• an airline with a strong northeast presence (like Continental, US Airways, and to a lesser extent, Delta)

United has long called for increased consolidation within the industry, but hasn't really been specific in saying which airline would be a best fit. Both Continental and Delta have been rumored to be serious possibilities, and United actually contacted Delta back in 2005 about a merger. (Delta declined.) Delta seems, at this point, the most likely candidate - it has one of the strongest Atlantic networks, it has a southern hub (at Atlanta), and it has a pretty good northeast presence. Of course, other airlines are fair game, too - and until United management announces which airline it's interested in, we probably won't know for sure.

US Air and Delta - merger tidbits

A little update on the US Airways/Delta merger situation. I read over the letters that the CEOs of the two airlines sent each other. I chuckled at the fact that US Air CEO Doug Parker called his Delta counterpart as "Jerry". (You can read the two letters here and here.)

Yet despite all the amicable talk, Jerry isn't giving in to Doug's request. Instead, both sides have launched massive PR campaigns in order to try to sway public opinion towards their sides. US Airways has hired the firm of Joele Frank, Wilkinson Brimmer Katcher in order to show its case for a merger (read: takeover), while Delta has hired Kekst and Co.

According to USA Today, US Airways has created a newsletter called For the Record, which will present news about the merger, although obviously in a pro-merger way. For its part, Delta has carried out a full page ad in Atlanta's Journal-Constitution going against the merger. It has also given out 50,000 lapel buttons that say 'Keep Delta My Delta'.

But lapel pins might not cut it. Delta faces an uphill struggle to stay independent from US Airways. Jerry can try as hard as he can to avoid a merger but in the end, it's up to the creditors. And if the US Airways team can convince them that the merger will be the most beneficial for them, then it will probably happen. Here's my advice for both - or rather, my opinion on what they might do, since I am probably unqualified to give any real advice:

• Delta should explain clearly why this merger is a bad thing - or rather, isn't beneficial. The lapel pins and a full-page ad may foster some sympathy, but it's probably not enough in the end. The consumer should be aware of the downsides of such a merger (frequent-flyer program hassles, integration hassles in general, decreased competition, higher fares, etc.).
• US Airways should explain in its campaign about why this merger might be beneficial. An increased route network means more destinations on the same frequent flyer program, which is something that travelers look for.

Feel free to leave comments!

Could a United-Delta merger happen? It might

United will probably enter this merger madness that's gripping the industry at the time, some analysts predict. At a Citigroup investor conference yesterday, United's CFO, Jake Brace, said that "the industrial logic of mergers in the airline industry is so compelling... We believe mergers in the airline industry have significant synergies, and we believe the industry needs to consolidate."

He also wouldn't say much about the subject of Delta, but wouldn't rule out anything in way of a merger. "We're going to do what makes sense for our company, and we'll be interested to see what happens with US Air and Delta," Brace said.

A United-Delta merger would make much more sense from a variety of standpoints. The two airlines have more compatible fleets - both predominately Boeings - as opposed to US Airways, which has an almost all-Airbus fleet. There is also less overlap between the two airlines' hubs, compared with US Airways. United has hubs at Los Angeles, San Francisco, Denver, Chicago, and Washington, while US Airways has hubs at Phoenix, Las Vegas, Charlotte, and Philadelphia. In contrast, Delta has hubs at New York JFK, Atlanta, Cincinatti, and Salt Lake City.

Could a merger happen? It might. Analyists predict that United will place a bet for Delta, and will do so sometime soon.

UAL Head to Stay Until 2011 While Merger Rumors Swirl

United Airlines today extended the contract of its CEO, Glenn Tilton, until 2011, ending speculation about his departure (his previous contract expired next year).

Tilton joined United in September of 2002 and headed the airline during its long Chapter 11 bankruptcy process. But now that United's out of bankruptcy, Tilton is calling for 'more consolidation' in the industry - meaning mergers of some sort. "Deregulation has done its work," he told the Financial Times earlier this year. "It's time to recognise that we should compete on a grander scale. Should the opportunity present itself, we'll make sure we're in a position to take advantage."

Which airline would Tilton like to see United merge with? Most people think Continental, because the two airlines operate similar aircraft and don't generally fly the same types of routes. Continental has a strong Latin America and European presence and United's Asian route network is the best in the industry. Yet Continental's CEO, Larry Kellner, has repeatedly said that Continental wishes to remain independent.

Whether or not that happens we'll have to see, but I bet that two of the legacies will merge next year... probably a United/Continental combination