Source: The Denver Post
Author: Kristen Leigh Painter

Nearly three years after United Airlines and Continental Airlines merged, outward appearances finally suggest a unified airline, but labor inefficiencies are threatening to further delay the fulfillment of the promised merger payoff.

Although the airline has shown recent successes stemming from the merger, when the Department of Justice announced last month that it may potentially block the American Airlines-US Airways marriage, critics began looking under the hood of previous airline mergers to explore their effectiveness and impact on the competition, consumers and investors.

One of the biggest financial claims made during United-Continental's congressional hearing in 2010 was its estimated $1.2 billion in "synergy" benefit — or financial payoff — by 2013. United is still far from achieving this fiscal benchmark as it nears the end of its third quarter in 2013.

"I think by and large these are not real numbers. They are created to justify the merger," said Severin Borenstein from the Haas School of Business at the University of California, Berkeley. "It is pretty difficult looking at the U.S. airline industry (to believe) that mergers are actually going to lower costs. There is no evidence that they deliver more cost-efficiency."

Though the payoff has been harder to quantify, United has achieved several encouraging benchmarks this year, including slowly improving financials, a decreased rate of reservation system disruptions and vastly improved on-time performance compared with its abysmal 2012 statistics.

Signaling confidence in the carrier's financial health, United chief executive officer Jeff Smisek recently purchased $250,000 worth of stock in his own airline.

Despite these positive indicators, some analysts wonder if it is good enough to offset the still-divided labor groups.

"There are inherent inefficiencies in merging, but you have to overcome that and then get beyond that (to achieve the benefits)," said Borenstein, "and it sounds like they are still trying to get over that hump."

All of the airline's labor groups are still operating under separate contracts, essentially segregating United and Continental staff from each other despite what their newly donned matching uniforms suggests.

For the flight attendants, both United and Continental sides are operating under new, post-merger contracts that give them "metal protection." This means that only United crews can fly on United aircraft and only Continental crews can fly on Continental aircraft.

Meanwhile, the company is moving aircraft around its system as it is trying to match the right-sized airplane to various markets.

"So, the crews have to follow the aircrafts," said Ken Kyle, president of Denver's Local Council 9 of the Association of Flight Attendants — CWA, AFL-CIO. "It is not fiscally efficient, and it is not operationally efficient."

This metal protection has given rise to satellite bases. For instance, while Denver already has a United domicile — as it is the largest carrier at Denver International Airport with 40 percent of the market share — the merged airline had to open a Continental satellite base at the hub so that it would have flight attendants handy to fly on Continental aircraft.

Additionally, Kyle said, they've seen an increase in multi-day trips for Denver-based flight attendants and an increase in "deadheading" — which requires the airline to fly its own employees from their end destination back home.

"That takes a passenger seat away from a paying passenger," Kyle said, but it is happening "in essence, to push the flight attendants where the flying is."

Nearly two years after Smisek's deadline for finishing collective-bargaining agreements, only the pilot work group (represented by Air Lines Pilots Association) has approved a joint contract but has yet to intermix on flights.

Meanwhile, International Association of Machinists represents several of United's work groups, such as ramp agents, customer service and baggage handlers. The membership rejected a tentative agreement in April, partially because it would outsource work at six of United's stations.

"They were concerned about work rules," said Wes Frederickson of IAM Local 1886 and a baggage handler for United. "They are still negotiating at this point."

The flight attendants are currently in joint negotiations with United's management, meeting once a month for a week at a time.

"We do think it is very important, and we are working very closely with the unions that represent them to come up with new contracts," said Megan McCarthy, a United spokeswoman.

Kyle contends that the flight attendants pushed for more frequent meetings but said management wouldn't agree to that.

"We all thought this integration would be much further along," Kyle said. "which gets back to the driving force of this merger — which is the investors who thought that the efficiencies with one single airline would drive the $1.2 billion synergy benefits. ... The last part to achieving this seems to be the labor contracts."