United and Continental Experience Merger Pains

Pilots Protesting on Wall Street Tuesday
 Wall Street Journal: In the year since United Airlines and Continental Airlines merged, the economy has weakened and the price of aviation fuel has soared. But business for United Continental Holdings Inc. has been surprisingly rosy.

The Chicago-based airline, now the world's largest by traffic, is on course to turn a $1.4 billion profit this year. It is sitting on an $8.4 billion cash pile, its unit revenue gains are leading the industry and it is moving briskly to repaint its fleet and rebrand its airport terminals. Earlier this month, Fitch Ratings raised United's credit rating by a notch, citing significant debt reduction and cash-flow generation.

But things may become difficult in the coming months as the new United tries to clear three tall hurdles: new labor contracts, a new reservations system and government approvals. Events this week suggest that may come to pass.

On Monday, the Air Line Pilots Association, which represents United pilots, sued the company in federal court, alleging that "revised operating procedures" in relation to the merger are "inadequate to maintain the levels of safety" United passengers expect. The union is asking to postpone the airline's implementation of its latest phase of postmerger training.

United said the suit is an attempt by the pilots union to tilt current negotiations for a new contract toward the aviators' interest, according to internal correspondence between the company and the union. It said the complaint "is entirely without merit."

The suit "is a shameful effort to influence negotiations for a joint collective bargaining agreement, under a false guise of safety," the company said. Pilots from United and Continental, which both are represented by separate branches of the ALPA, are scheduled Tuesday to protest what they see as the slow pace of labor negotiations. Safety concerns aren't expected to be voiced in that venue. The pilots are planning a rally outside the New York Stock Exchange to send a message that some of the merger synergies investors want to see won't be realized until the carriers' work forces are combined. Currently, both pilot groups are working under concessionary terms negotiated years ago when the industry was in dire straits.

To Jeff Smisek, United's chief executive officer, the merger process is on course. "We're where we expected to be," he said in an interview last week. "There are thousands and thousands and thousands of things to do, but just like dominos on a table, you knock 'em over one by one by one."

Asked to judge Mr. Smisek's performance, Capt. Jay Pierce, chairman of the ALPA branch at Continental, said last week: "In terms of painting airplanes and maintaining the stock price, I'll give him an A. But in terms of operational issues, I'll give him an Incomplete."

Mr. Smisek initially expected United would be able to reach common labor agreements with all its workers by the end of this year.

But in recent months he has conceded that he was overly ambitious and that the "cumbersome" process of employees selecting which unions will represent them in the combined company has slowed progress. He also has warned that United isn't going to agree to contracts it can't afford.

Capt. Wendy Morse, union chief of the United pilots who sued the company Monday, said the lawsuit aims to halt unsafe training procedures the union complains are being rushed to complete the merger. "There is no stopping, no taking inventory," she said. "It's just proceed, proceed, proceed."

The FAA declined to comment on the lawsuit.

Also on United's checklist, the company must secure a single-operating certificate from the Federal Aviation Administration so it can meld its safety, maintenance and operating procedures, which will let it mix and match its planes and crews.

The company must then integrate its complex and incongruent passenger-reservations systems, which are the digital heart of airlines' customer relations—storing, organizing and calculating flight schedules, fares and passenger transactions. The airline plans to transplant United's Apollopassenger-reservations system into Continental's Shares system. It plans to make the switch in the first quarter of 2012.

Merging two systems is an enormous technology undertaking. "No one's ever done one this big," said Scott Nason, an airline-technology consultant and former information-technology chief of AMR Corp.'s American Airlines. "And there have been others that didn't go so well." Problematic switchovers can lead to flight delays, lost bags, overwhelmed reservations centers and inoperable check-in kiosks—for days or even months. Marrying computer systems is a bloodless task. Merging cultures and unions can be hairier.

Finally, in what is likely to be the most arduous task, United must reach new labor contracts with its far-flung employees—and then hope that the various unionized groups can agree among themselves to joint seniority lists.

At stake is more than $1 billion of annual cost savings and revenue gains United hopes to lasso by 2013, when the company is fully operating as one.

Already, United is "connecting the dots" on its extensive route network, Mr. Smisek said, by leveraging the market clout of one subsidiary to add flights by the other. For instance, Continental has long been strong in Mexico, so the combined airline has added flights to that country from United's West Coast hubs. United is big in Hawaii, so the airline has added flights from the West Coast to the Aloha State with Continental aircraft.

Mr. Smisek, a 57-year-old lawyer who was CEO of Continental before the combination, aims to secure the single-operating certificate by year end. To do so, management must align thousands of rules and procedures into standard operating manuals.

Pilots and independent safety experts said Monday's suit, filed in U.S. District Court in Brooklyn, N.Y., is unusual because it raises safety questions in the context of litigation and contract negotiations.

Some frictions arise from differences in training procedures and philosophies at Continental and United. Continental pilots tend to rely on off-the-shelf Boeing Co. operations manuals. United pilots said they have traditionally worked more closely with management to agree on safety and training issues.

One reason behind the United pilots' suit is the growing reliance on computer-based training. Many commercial pilots feel pressured because their annual training courses cover more topics each year, while time to learn the material has steadily been reduced.


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