[Openflow-dev] Merger Mania and the Travel Manager

[Summit M. S. <sum...@ms...>]

Merger Mania and the Travel Manager

May 07, 2010

What does the Continental/United Merger mean to you?

Everyone seems to be thinking the same thing: "What next?" Imagine how
the pilots, flight attendants, employees, managers, pensioners,
frequent fliers, and assorted hangers-on at Continental and United
Airlines must feel.

Added to the mix of improbable events of the last 30 days was another
round of Airline Musical Chairs, euphemistically known as
"Consolidation." On Monday, the worst kept business rumor of the
previous week was officially announced - United Airlines and
Continental plan to merge and create the world's largest airline, as
well as the world's largest airline alliance.

And then there were four.

Now that we're down to four legacy carriers (American,
Continental/United, Delta and US Air), there doesn't seem to be much
doubt that smaller markets are bound to suffer. The new concentration
of United/Continental domination in eight major hubs around the
country, (Los Angeles, Chicago, Cleveland, Houston, Denver, San
Francisco, Washington and Newark), now covers more than half the major
business markets in the USA.

Does anyone who flies regularly really believe there are still "too
many seats" and excess capacity in the US Air Traffic System? If you
paid $1150 to fly in a completely full "right-sized" sardine-can from
Newark to Kansas City last week, your answer is probably a resounding
"No!"

First things first: YOUR FREQUENT FLIER MILES ARE SECURE.

Every time one carrier takes over another, the first thing we hear is
people panicked about losing their frequent flier miles. It hasn't ever
happened, and it's unlikely that it ever will. In this marriage, there's
no way anyone will lose a single mile. Good luck using them, though!

We assumed this merger was imminent when Continental bolted from the
Sky Team alliance last year. By joining the Star Alliance, where United
reigns as the founding pillar, the path was clear. Evidence has been
easy to find on the Continental website, where United flights
immediately started showing up everywhere, even as US Air and other
Star Alliance flights were ignored.

The cynical might say that rumors of the merger of United and USAir
were just to bring Continental to the table. We speculate it was just
to throw people off the scent. This plan has been carefully
orchestrated since before Delta announced its acquisition of Northwest
last year. The synergies of this deal are similar.

So what does the Merger to end all Mergers really mean to you? Get
ready for more of airplane "right-sizing" (which translates to "smaller
airplanes"), especially in second and third tier markets such as St.
Louis, Pittsburgh, Memphis, and a few larger ones including Denver and
Cleveland. You can bet that flight options in markets where Continental
and United compete (think New York/Denver and New York/LA-SF) are going
to shrink more than they already have. Fortunately for the travel
manager, neither of these airlines was a market maker in terms of
price, so base fares in competitive markets won't rise much, but all
bets are off where they are the dominant carrier.

In a transparent attempt to maintain the loyalty of United's frequent
fliers, the name of the new carrier will be "United." We understand
that a condition of the transaction was that the company's headquarters
will be located in Chicago. United's reputation for poor service will be
hard to overcome, and there are a lot of questions about just what other
elements of the "United Way" will survive. International First Class?
The extra leg room for the first eight rows of coach? Who knows? 

The official announcement was a masterpiece of ambiguity and requisite
corporate doublespeak. We will stay on the lookout for developments as
they are announced.

Assuming the transaction passes the battery of obstacles to closing,
they're shooting to close at the end of the year in this "all stock"
transaction. What are the odds they'll make it? And what will the
market for stocks look like in the light of today's incredible
volatility? Again, who knows?

There are lots of hurdles ahead. Labor relations at United are
notoriously strained, and the sacrifices of Continental's union
employees are going to be hard to rationalize in this de-facto buyout
of United. Multiple antitrust objections must pass through the Justice
Department. Slots at key airports will probably have to be swapped.
Thousands of employees are likely to be laid off.

And, of course, countless senior managers must receive their golden
parachutes as they must walk the plank and leave the industry, at least
for a while.

Next week, we can examine the effect on competition in greater detail,
unless something else crazy happens!

Now, for something completely different. If you've got a meeting coming
up, invest a few moments and schedule a consultation on our website at
www.SummitMgt.com or call 1-800-835-9767 ext 120. You'll be glad you
did!

Safe travels,

Rob and Joe Lipman 

Visit Summitmgt.com

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