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Continental and United – A Marriage Gone Wrong?
Jeff Smisek is a Turnaround Guy. He did that to Continental. But The Merger of United-Continental is Proving a Tougher “Trench Warfare” to win. Will The Fight for “Survival” end up as a Slugfest gone Wrong?
Issue Date - 26/05/2011
Talk of regrets. Not with Jeffery Smisek, the CEO of the $8.43 billion worth United Continental Holdings. An economics major from Princeton University, he was on the run to get a Ph.D at MIT. He dropped out and joined a bank in New York instead. After working for two years there, he joined Harvard Law School in 1979. Main reason? He wanted to be near his girlfriend Diana Strassmann, who was then studying in the Economics department at Harvard. Three years later, romance got the better of him again. With no employer’s card in his pocket, he decided to follow Diana to Houston (who had joined the Economics faculty at Rice University). Many advised him against doing so, but it turned out to be a good choice. The Harvardian soon found his fair share of luck in the corporate law market. Over the years that followed, Smisek became a successful M&A and Securities lawyer. But it was not until the summer of 1995 that Smisek’s career took the right course. A friend helped set up an appointment with Gordon Bethune, the-then CEO of Continental Airlines in May that year. The airline was in a mess – financial & operational – and Smisek had hoped to win a client account. To be fair, Bethune turned out to be a better salesman. He convinced Smisek to quit his cushy ‘Partner’ position in the famous Vinson & Elkins law firm and join the struggle of existence at Continental as the Senior VP & General Counsel. Again, many suggested that it sounded too risky – why leave the ground and leap into a dry well? But for Smisek, to play Captain America to Continental was not difficult a choice to make. He was a believer. He was the one who had once got lucky in love – running after Diana & winning her hand for marriage. 16 years later, he finds himself as the CEO overseeing yet another marriage – that between Continental & United Airlines. Only this time, chances of this marriage working out is slim.

Slim? Yes. Agreed that the $3 billion merger (closed on October 1, 2010) between US’ 4th & 5th-largest airlines (United & Continental resp.), has created the world’s largest airline by revenues and the 3rd largest by fleet count (707 as of April 30, 2011; after Lufthansa’s 746 & Delta’s 744). Even its topline of $32.72 billion for FY2010 was the highest for any airline globally. But size alone guarantees nothing. Beneath the hubris, even Smisek can sense a closet full of troubles. And it comes in the name of bleeding bottomlines. During the past two years, when US carriers made a combined $3.7 billion in profits, the two partners lost a total of $1.27 billion (United – $1.17 billion and Continental - $107 million). There is also the problem of falling footfalls. During the 12 months leading to January 2011, the combined passenger count for the two parties saw a y-o-y net reduction of 4.77%. The situation assumes an alarming status when seen in the light of absolute numbers. While the combined entity witnessed a fall of 3.69 million in passenger count, others like the #2 Delta & the #3 Southwest saw their numbers rising by 32.49 million (growth of 56.46%) & 5.04 million (growth of 4.94%) respectively. So, with all balloons being burst in the name of size, suddenly, the leader’s hat seems to have caught fire. Smisek is aware of it. He had walked into a similar situation 16 years back. That time, he had saved the ship. This time, the sea is rougher. Is Titanic being retold?

The crisis will require more than just personal style. He has a lot of it. “Smisek has the same sort of task at the merged entity, as he did when he turned around Continental. Especially at United and the merged company, he has much work to do on the personnel side. Good thing is, he is committed. Historically, it could have been someone like Bethune – who was Jeff’s predecessor at Continental – or even Frank Lorenzo – who saved Eastern Airlines, but for the moment, Jeff is the right guy,” says Washington-based Bob Mann (who was involved in both the US Airways-AmericaWest & Delta-NorthWest integrations), President of R.W. Mann & Co., to B&E. But the air pockets do not come with warnings, even for the “right guy”.

For the world, the merger is a strategy meant to achieve leadership. In truth, it is a well-disguised “survival strategy”, an attempt to save both Continental & United. Since 2006, airlines around the world have been plagued with illogical expansions. It was no different in the case of United & Continental. Today, overcapacity is the issue. So the merger is a solution, as Dallas-based Rick Seaney, CEO of FareCompare LP tells B&E, “Newly minted airlines – as this one – cut seats and flights, leading to less frequent departures & packed flights.”

Actually, the first warnings of corrective action from both the airlines had become apparent much before the merger was announced. “Route rationalisation” is what they call it, effectively implying a reduction in total count of operating flights. And Smisek and United’s CEO have been doing just that. As compared to the same period five years back, United’s flight count for the period between March 1, 2010 & February 28, 2011, has fallen by 32% (currently standing at 340,000). Similarly, Continental’s count has fallen by 22.33% to 240,000. So, the process of flight reductions was initiated as early as 2006. What this merger therefore does is that it will give shareholders a reason to believe that deleting routes and reducing flights means trouble-not-at-hand. [If this were not so, why was it that the other party to first propose a merger with Continental, i.e. US Airways, was also the only other besides United, whose flight count had fallen in the same period as discussed before – a fall of 19%?] Understandably, the largest carriers in US today, which are in a growth mode today, are not talking of mergers. The largest being Delta (flight count increase of 45.45% to 736,000), and Southwest (rise of 3.9% to 1.131,000). As for Smisek, he has mixed goals to achieve – increase revenues to please shareholders, and cut down on routes and flight counts to save money and the merger. Not easy.


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