INTEGRATION FOCUS
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or an industry that’s suffered from more than its share of nasty external shocks in recent years, domestic airlines are currently benefiting from a pleasant surprise or two. First, there was the return to relatively stable fuel pricing after years of volatility. Then there was the return of business travel after a cost-cutting couple of years. And most recently, of course, there was the return to profitability. US Airways posted the highest third-quarter profit in its history, and both Delta and American Airlines also returned to profitability. Meanwhile, Michael Derchin, Principal at CRT Capital Group, expects profits of $3.9 billion this year and $6.7 billion in 2011 – not bad for an industry that’s experienced seven unprofitable years in the past decade and is in the middle of what’s generally being hailed as a modest overall economic recovery. It’s been a welcome upturn for the beleaguered industry. And what’s more, October saw the creation of a new market leader, as Chicago-based United Airlines merged with Houston-headquartered Continental to create the world’s largest carrier. When the integration process is fi nally completed late next year, the new United will serve 378 airports with hubs in 10 cities, 5811 daily departures and an estimated 144 million passengers a year. The merger is also expected to bolster the new airline’s international presence, with United strong in Asia and Continental a market leader in Micronesia and Latin America. After the merger, the company will have 148 international destinations in 59 countries. “With great people, an unparalleled global network, the best new aircraft order book among US network carriers and a commitment to superior products and services, United is well positioned for a bright future,” new CEO Jeff Smisek told reporters on signing the deal last month. However, while industry experts see the merger as having plenty of attractive synergies, senior management faces a number of key integration challenges if the fi rm is to hold onto its newly minted crown as industry number one.
A perfect match? A 15-year veteran of the airline business, Smisek only took on the CEO role at Continental in January. Charged with bringing the airline back to profitability after it lost upwards of $1 billion following the September 11, 2001 terrorist attacks, he now faces what is potentially an even bigger challenge as boss of the new United: integrating two major airlines, each with its own IT systems, labor culture and operating issues. The fact that he is doing so in a tough economic climate where margins are tight makes it even harder; but nonetheless, the consensus amongst industry watchers is that the new fi rm has found the right man for the job. “If you are an airline geek, it doesn’t get any better than this: bringing these two carriers together,” says Smisek. “They are the perfect marriage, the perfect fit. I think we’re creating a tremendous carrier here.”
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Hired in March 1995 as general counsel and senior vice president, Smisek has overseen corporate communications, labor relations, government affairs and many other executive functions during his time at Continental. It gives him valuable insight into the multiple challenges the new firm will face as it looks to forge a united company from two disparate cultures. “He understands Continental’s culture and the airline business,” says former CEO Larry Kellner, who along with Smisek formed a key part of the Gordon Bethune-led management team that is widely credited with turning Continental into a profitable and service-oriented airline in the 1990s. And in at least one respect, Smisek has firmer foundations from which to build than when he fi rst joined Continental: his new project is starting out from a much sounder fi nancial footing. In line with its peers, United posted a $387 million profit last quarter compared to the $57 million loss reported during the same period last year, with both revenue and yield seeing substantial double-digit increases; Continental, meanwhile, posted a $354 million profit against the $18 million loss reported last year, with a similar growth in sales. Compared to this time last year, the two companies are in rude health. “Th is is an industry that has faced a fairly tough ride over the last few years,” explains Andy Golub, Head of Risk Advisory in the New York office of aviation consultancy firm Ascend. “There’s been a lot of chatter about overcapacity in the US industry, and there’s been a fundamental shift in the balance of growth between the legacy airlines and the low-cost carriers. In addition, there have been a lot of curveballs that have been thrown at the sector, from high fuel costs to scale-backs in business traveler profi les. But overall, the industry’s in better shape right now than it has been for some years.” What’s more, Golub believes he sees enough synergies to suggest that the merger can be a success. “What you have is two complementary profi les, with relatively benign overlap on a lot of their networks; I see a lot of synergies,” he explains. “You have United’s core road warrior/business traveler customer base connected with Continental’s new fleet and internationally competitive brand identity, and I think that’s really where you’re going to see a lot of the focus in terms of recasting the brand.” The merger works from a geographical perspective, too. United has a strong West Coast structure and a massive hub in Chicago that controls central routes, while Continental has built up what Golub calls “a terrific presence” in Newark, which serves connections eastwards into Europe and south to Latin America. “They are going to have a really broad, integrated network under one carrier’s colors that can compete with Delta in serving a wide range of business and leisure travelers,” he says. “They have limited overlap and a lot of potential synergies.”
Integration challenges Nonetheless, just because the synergies are there it doesn’t follow that the merger will automatically be a success. According to Ernst & Young’s Capital Confidence
05/11/2010 16:56