Continental-United Airlines Merger: No Fare Hike Built into Profit Plan

Continental-United Airlines Merger: No Fare Hike Built into 'Synergies'
Continental-United Airlines Merger: No Fare Hike Built into 'Synergies'

Worried about a fare hike after Continental Airlines (CAL) and United Airlines (UAUA) merge? Try this comment on for size and see if it sets those worries free.

"No airfare increase is built into the synergies," said Continental CEO Jeff Smisek (pictured) during a conference call with analysts and the media following the carriers' announcement of their $3 billion megamerger agreement with United.

Smisek was responding to a question on the call as to whether the $1 billion to $1.2 billion in net annual synergies the company expected to achieve over the three-year post-merger period would come, in part, from fare hikes. After all, $800 million to $900 million of that billion-dollar windfall is predicted to come from incremental annual revenues.

While the carriers didn't factor in a fare increase when coming up with their synergies figure, a large part of it deals with expected cost savings, as is the case with most mergers. And that concerns the pilots unions and likely other employees at both carriers.

"The pilots who fly for Continental and United are prepared to stand shoulder to shoulder to support the creation of a viable, profitable merged company," said Capt. Wendy Morse, who represents United pilots, and Capt. Jay Pierce, who represents Continental pilots, as part of a joint statement from the Air Line Pilots Association.

The unions call for an equitable integration of the pilots based on seniority and a new, joint collective-bargaining agreement.

They further noted: "We are also prepared to stand shoulder to shoulder in opposition of this transaction should these ideals and concepts not immediately be fostered by the new management team. Both the United and Continental pilot groups understand what can be achieved by working together; and, in concert with the new management team, under these conditions welcome the opportunities and expected rewards of building a winning combination."

Back-Office Employees Will Suffer Most From Layoffs

Pilots, flight attendants, and those working at the terminals that serve both airlines may find themselves with more job security than other employees at the carriers. That's because the two airlines have very little overlap with their domestic routes and none with their international. And after the merger, the combined airlines plans to continue serving the same communities each carrier currently services.

Employees working in back-office positions in areas such as marketing, finance, legal and administration, will likely take the greatest hit.

While the CEOs of Continental and United acknowledged that corporate and administrative jobs are typically reduced in any merger as part of cost-saving moves, the carriers plan to cut staff as much as possible by via attrition and voluntary layoffs. They declined to disclose the magnitude of the layoffs that they envision as part of their "synergies."

A United spokeswoman declined to disclose the percentage of employees who are in-flight crew, versus those who are considered administrative and corporate.

After Two Years, Continental Came Back to the Table

The deal is subject to regulatory and shareholder approval and is expected to close by the end of the year. After the deal closes, United shareholders will own a 55% stake in the combined company, United Continental Holdings, which will operate under the carrier name United Airlines.

Although United shareholders will hold the majority stake, it was Continental that chose to revive the courtship between the two airlines, going to United on April 9 with the idea of resuming merger talks that had failed two years earlier.

"In 2008, when we had these earlier discussions, the economy was at the cusp of the greatest recession since the global depression. Fuel prices were screaming to unprecedented highs and subsequently went even higher. The capital markets were distressed and had limited access for airlines to capital markets, and our liquidity position of both carriers was a bit stressed as well," Smisek said. "Now, fast forward to today, where we have the economy improving, we've got business travel returning, we've got fuel prices [that] although high are manageable, we have access to the capital markets, and our liquidity is better than we've had in many, many years. So, the stars have aligned for what is a great strategic move."

Continental's Smisek made his move to resume talks with United when he learned through media reports that it was entertaining a deal with US Airways. He noted he's been keeping a keen eye on rival Delta Air Lines, which is currently the world's largest carrier and a strong competitor in the New York and Latin America markets.

With the merger, Continental, the world's fifth-largest airline, and United, the fourth, will become the largest carrier based on passenger traffic.