Source: Houston Chronicle
Author: Kiah Collier

The turbulence rocking the integration of United and Continental airlines this year has largely cleared, observers say.

But two years after the deal was sealed, these same analysts have varying opinions about how United Continental Holdings has handled the merger so far and when the new company might reap the full benefits of the $3.2 billion marriage that created the world's largest airline.

"I do think the worst of it is behind us and that the technological things will be a thing of the past in another month," said Darryl Jenkins, an independent airline consultant and chairman of the American Aviation Institute.

He referred to the lingering issues in the wake of United's migration earlier this year of millions of reservations and frequent-flier accounts into a joint system.

Jenkins cited recent improvement in on-time performance, which has increased significantly every month since July, when it bottomed out at 65 percent. United has achieved its on-time goal of 80 percent so far in September, according to FlightStats.com.

Switch and aftermath

In the months following the March switch to the former Continental reservation system, perhaps the biggest milestone of the merger that closed on Oct. 1, 2010, consumer complaints have soared as the carrier's on-time performance eroded and profits slipped.

A system outage last month that shuttered United's website lasted over two hours and resulted in 580 flight delays and nine cancellations.

"This year highlighted one of the perils of an airline acquisition or integration of this size," said Fred Lowrance, an airline analyst at Avondale Partners.

But Lowrance said the airline appears to be turning things around.

The Chicago-based parent company has offered assurances it is working diligently to fix lingering glitches and make its computer system easier for agents to use.

"Look, we know what we did to get us into these operational issues we had, and we know how to get back out of it, and we will," Jeff Smisek, United's president and CEO, assured an analyst during a conference call announcing the carrier's second-quarter results, which slid 37 percent.

Applause for merger

When the merger was announced on May 3, 2010, it was widely hailed as a smart business decision that would create a stronger airline.

For one thing, the industry's profitability waned in the wake of the Sept. 11 attacks and the more recent recession.

"The way we look at it is, companies cannot have rising stock prices in an environment of declining earnings and no growth," said Helane Becker, an airline analyst at Dahlman Rose. "And that's what was happening in a lot of the last decade."

The merger was considered especially smart because, domestically, United was a major player in the West, while Continental had a strong Northeast presence. Internationally, Continental was a big player in Latin America, while United was strong in Asia.

The new route network "gives them a tremendous opportunity," said Larry Kellner, who stepped down as CEO of Continental at the end of 2009. "The question is, going forward, do they pull forward and really take advantage of all that?"

United says it remains on track to reach more than $1 billion in savings related to the integration.

Becker said the merger has gone "as well as could be expected," without joint contracts in place with the two pre-merger pilot groups. United has yet to hammer out joint contracts for any of its work groups, meaning flight crews must still fly separately - and only on their pre-merger aircraft - a huge obstacle to efficiently deploying aircraft.

"Essentially what a merger makes is a bigger airline and it's questionable whether or not it makes a better airline," said Gary Chaison, a labor relations professor at Clark University. "And that's what they have to work out with their people issues."

Obstacles to clear

Analysts agree United appears to be on track to achieve its "synergy targets." But they say a fragmented workforce will drag down the company's financial potential, which has already taken a hit this year because of its poor operational performance.

"The longer this drags out, the longer it may take to realize the full benefits of the merger," Ray Neidl, an analyst at Maxim Group, wrote in a note to investors last week when United announced it expects a surprising drop of 1 percent to 2 percent in passenger revenue for the third quarter.

But, Neidl wrote, "We still consider UAL as being the premier world airline."

The analyst Lowrance said, "Consolidation will only make things better for United and for the rest of the airlines industry."

Concerns about customer service remain, and many say that won't improve until the workforces are integrated.

Jon Taylor, a frequent flier and chairman of the University of St. Thomas political science department, flies United to China two or three times a year for research. He said he's noticed "a marked decrease in customer service and employee motivation" since the merger.

In June, he was stranded in San Francisco for almost a day with his 10 students on the way to China - and delayed somewhat in Beijing on the way back.

"Makes me want to seriously rethink using United for future trips to China," he wrote in an email, "but since they are one of the primary carriers to the nation that is (the) focus of my academic research, I'm forced to grin and bear it."

The company had decreased the number of spare planes it keeps on hand in case of maintenance issues but says it has reversed that policy as it exacerbated delays and cancellations.

Customer service- related complaints have escalated since the merger, Transportation Department data show.

Still, there have been bright spots. When United's Dreamliner touched down Friday in Houston, the big jet was hailed as a much-needed customer-pleasing investment.

Fewer perks

Many travelers haven't had problems with the airline.

"I think a lot of the negativity that has been perceived as related to the merger has been related just to the airlines globally having to cut back a lot of the perks and benefits that they had," said Steve Murphy, a United frequent flier who travels mostly for leisure.

But Murphy's friend Stephan Segraves, an elite frequent flier who travels every week for business, said he expects "a little better customer service" for people who spend thousands of dollars a year to fly United, often paying higher fares. These elites contribute a substantial chunk of an airline's revenue.

While a merger may look good in the short term, said Jack Stelzer, a Houston-based independent airline consultant, "in the long term if they continue to abuse the customer, the customer will go away."

Analyst Henry Harteveldt, co-founder of Atmosphere Research Group, said part of the problem is that former Continental fliers hate United, while fliers of the old United hate Continental.

"They've got to figure out how to get both sides to love this airline," he said.