Challenges that Lie Ahead for the United-Continental Merger

On Saturday, in advance of the announced merger of United and Continental, I offered my thoughts and predictions on what would result.

My bottom-line was quoted in Monday’s Chicago Tribune:

“It’s too early to know whether Continental (will) run the joint effort the way they’ve run their own shop,” said airline blogger Gary Leff. “If they do, it will be a boon to customers.”

Regular readers know that my biggest question or concern is whether the combined entity will continue United’s practice of ‘starnet blocking’, preventing members from redeeming miles for award seats that partners are offering.

Nonetheless, having talked to several reporters over the past few days, I thought in broad strokes I’d offer some additional take on the challenges nad issues ahead for the two carriers.

The United-Continental merger will not reduce costs. Despite PR claims about $200 million in savings (an excrutiatingly small percentage of the overall costs of the two carriers combined, rounding error almost), labor costs will rise with the combination of workforce and senior lists. Those costs will be locked in right away. Integration costs will be substantial and upfront. On the whole there’s the chance for cost reductions but those should be heavily discounted as less certain and in the future.

The revenue gains will be modest. United and Continental say $800 million but certainly this double counts gains that would accrue anyway as a result of their Star Alliance partnership, anti-trust immunity, and joint ventures. Surely reduced capacity could translate into some higher fares, but the revenue gains will be modest.

The real gain is an improvement in United culture, and a risk to Continental’s. The merger gets ride of Glenn Tilton (and cashes him out, don’t think that wasn’t a huge driver in why this happened). It helps re-set labor relations at United. Continental has a much better and stronger culture, one that will be tested by integrating United’s employees with Continental’s. But the Contiental management team running the shop, at the same time that employees on the whole will be making incrementally more will be good for labor relations overall, even if some Continental employees will be less enamored with the joint entity than with what they started with.

The merger should sail through government approvals. The combined market share of the two airlines, while creating the largest carrier, will still be smaller than American’s market share just a few years ago. Delta-Northwest created the largest carrier and went through. Contientnal and United just successfully received anti-trust immunity through a similar process of scrutiny. It’s hard to imagine any problems except at the margins, government may have to ask for something to prove they’re doing their jobs but nothing that should scuttle the deal. Now, I don’t discount the possibility of govenment doing stupid things, but by all rights this should be approved.

United wanted a merger. Tilton in particular really wanted a emrger. Tilton and company get paid handsomely for doing a deal. They would have been willing to merge with US Airways if need be, but in opening those talks they brought Continental back to the table if only to prevent United from doing a US Airways deal.

Smisek and Company get to run the world’s biggest airline. Tilton gets his payout and to have made his mark in creating the world’s biggest airline. There won’t be nearly the promised synergies, cost savings,or revenue growth that the public relations folks spin out. But on net the combination isn’t terrible.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. If I trust any executive team in the US to run an airline, I would give it to Continental. Exactly what shareholder value is being created by this? Why should Tilton get a bonus?

  2. I don’t think they’re double counting their revenue gains from Star and JVs. Smisek and Tilton were very specific on the merger call that the “net synergies” gained would be “incremental” or on top of the gains already forecast from Star and their JVs. Interestingly enough Smisek also said that their net synergies forecast did not factor in a fare increase.

    I don’t know if they can be trusted, but that’s what their claiming.

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