In its early days, the US airline industry revolved around big personalities and visionaries, such as legendary Pan Am founder Juan Trippe. But those days are long gone, as is Pan Am itself. In place of the visionaries are specialists on mergers and acquisitions. The most recent one, between Continental and United Airlines, has created the world’s biggest airline.
The deal to form the new airline, which will still be known as United Airlines, was completed in March 2012, after a lengthy process of obtaining approval from shareholders and the US government. The process also included thousands of decisions from issues such as the size of coffee cups to the standardisation of boarding procedures.
While the merger of two of the world’s biggest airlines was not the easiest task, Toby Enqvist, vice-president of United’s Newark hub, says the biggest problems are already solved.
“The biggest challenge we had was consolidating our reservation systems. We had to do it all in just a couple of hours, as with 87,000 employees, 1300 airplanes and hundreds of flights daily, we could not just stop flying all of a sudden,” he says.
Industry experts say that technical glitches cast a shadow on the merger, but the situation is improving. “From the perspective of customers, issues connected with the integration of IT systems were problematic, but the final outcome is positive,” says Bob Mann, the founder of airline industry advisory R W Mann & Co.
Shashank Nigam, CEO of SimpliFlying, a Singapore-based airline consultancy, says: “The route network has been rationalised and the service is improving.”
Mr Enqvist likens the consolidation of United and Continental to hiking up a mountain: after a difficult climbing period, operations are now progressing smoothly, like walking down the other side. Yet, the new company’s earnings for the third quarter of 2012 show that the trek is still far from over. Net income of United Continental Holdings dropped to $6m from $653m a year earlier, while per passenger revenue decreased by 2.6%.
Another problem facing the merged entity is that the routes it has inherited are widely criticised as being domestic-flight heavy. “While domestic flights typically do not turn a profit, they are necessary to feed into United’s international hubs,” says Mr Nigam.
“Network strategy is about maximising the sum of the parts and not any individual route in isolation,” says Brian Znotis, United’s managing director of international planning.
Although there is a clear rationale to keeping some of the unprofitable routes, domestic flights are more likely to be delayed. “The less lengthy the flight, the fewer opportunities for pilots to make up the lost time en route. Some of the routes are so short there is not a stable flight period, just descending and ascending,” says Mr Mann.
New markets, new routes
United most likely will look for new international routes connecting its international hubs with emerging markets. “Our choice of routes generally follows what is happening in the world. That is why we are excited about opening routes such as Newark to Istanbul,” says Mr Enqvist.
United’s strategy regarding new international routes goes beyond targeting exclusively big cities or determining simply whether a certain location is either business- or leisure-oriented. “These broad categories are nuanced, with some routes, such as Bonaire [in the Caribbean], driven by divers and others, such as Ciudad del Carmen [in Mexico], by oil-rig traffic,” says Mr Znotis.
United’s eagerness to open niche direct routes does not mean its aircraft are to be seen at secondary airports rather than major hubs, as is often the case with budget airlines. “It is all about volume and connectivity. We were in London Gatwick, but we pulled out, because we did not have [these things],” says Mr Enqvist.
Instead of going down the ‘no-frills’ path, United chose ‘more frills’ with the order of 50 Boeing 787 Dreamliners. After years of production delays, the first 787 is scheduled to carry United passengers at the end of 2012.
The addition of the 787 to United’s fleet is no small matter. The aircraft is designed to fly long range; up to 12,900 kilometres without stopping. Mr Nigam says that the 787 will open the door to new destinations, potentially in high-growth markets such as Africa and the Asia-Pacific region.
The new design of the 787, which comes with more leg room and additional overhead space, could also help United compete with airlines such as Emirates, Etihad and Virgin Atlantic, which all score much higher than United in customer experience surveys.
Nevertheless, United has failed to take full advantage of the aircraft’s sleek design, according to Mr Nigam. “United had a great opportunity [to improve the] consumer experience with its new Boeing 787, but went with an uninspired cabin layout and seats. Such complacency needs to be shed if United wants to stay ahead of its rivals,” he says. “No one else stands still, United has to try harder [to win customers],” adds Mr Mann.
The race is likely to heat up even further if the consolidation trend continues. American Airlines and US Airways are currently holding merger talks. If the deal goes through, the new entity will outrank United as the biggest airline in the world.
If that happens, United should be sufficiently well established in its relationship with Continental to be able to measure up to the newlyweds.