So the rumors, that United and Continental were nearing a merger agreement, are apparently true: United and Continental will merge, with an announcement expected early Monday morning.
Assuming that federal regulators don’t put a stop to this, the newly combined airline (“Continited”?) will drop the Continental name and operate under the United banner. However, Continental’s CEO Jeff Smisek, will take the reins, with United CEO Glenn Tilton stepping back to the salutary title of “non-executive chairman” for two years. In other words, it’s Continental’s executive team, with United’s name, in United’s headquarters building. Assuming that current market shares simply transfer over to the combined entity, the merged United would have 21% of domestic ASM (available seat miles, i.e., market share) and 7% of global ASM, making it the biggest American player.
(Will this put an end to the on-again-off-again wooing of US Airways by United, in a seasonal display reminiscent of a National Geographic wildlife special? I sure hope so. It was growing tiresome.)
As I have argued several times over the years, these airline mergers are anti-consumer. True, there is no overlap between the United and Continental operating hubs, but a merger will give “Continited” a great deal of pricing power. Instead of re-inventing the wheel, here’s something I wrote in January 2007, that still holds true today:
Sure, you might get a few more potential destinations or routings for your flights, but the total number of flights is bound to be cut, and prices in turn are bound to rise. With less competition, it’ll be easier than ever to raise fares and make them stick.
The caveat to the “mergers mean higher prices” argument is that cuts in capacity (and increases in prices) eventually are met with new market entrants. Relatively constant demand is met with entrepreneurs wielding fresh supply. (The rise of JetBlue can, at least in part, be seen in the context of the disappearance of TWA and PanAm, through merger and bankruptcy, respectively.) The benefits to the merger participants are short-lived, and it’s debatable whether they actually pay off. Think back to past mergers: Is American really eating everyone else’s lunch since they bought TWA?…
In fact, the merged airlines’ competitors may benefit more. As fares rise, the companies that aren’t part of the merger arguably benefit more than the merger participants, because they get to raise their prices, without having paid the price of the merger…
So if consumers lose, and merging airlines don’t really win for very long, then who is the real winner in all this?
The answer: the CEOs, and the Wall Street investment banks advising them.
As the folks at Morningstar’s Footnoted.org blog noted earlier last week, the real motivator for a deal here isn’t “synergy” but “payday”:
We’re sure there are plenty of operational reasons United’s management might be looking for a deal. But we also couldn’t help noticing that the company has made it substantially more attractive for the top officers themselves to seal a deal — in the case of Chairman and Chief Executive Glenn Tilton, more than three times as attractive as in prior years.
According to the proxy that UAL Corp., parent of United Airlines, filed at 5:25 p.m. on Tuesday, Tilton’s payout if there’s a change of control rose to $9 million last year — up nearly fourfold from the $2.4 million listed in last year’s proxy. If he loses his job within two years after a deal, his payout would be $14.3 million, up 78% from $8 million last year.
Loses his job within two years? Why yes, that’s exactly what’s planned. What a coincidence!
It’s not just United’s current CEO who’s getting the big payday, either:
Other executives have seen similar jumps. Executive Vice President John Tague, also president of United Airlines, would see his payout in a change-of-control rise to $3.7 million, from $1.1 million. Total cost for the top five officers under a change in control scenario, even if none of them are fired: $17.6 million.
Footnoted’s post on the subject is worth reading in its entirety.
FYI: I am unable to get search results from the SEC’s EDGAR database right now, so I can’t see if there’s a merger bonus in the cards for Continental’s Smisek or not. (Try searching for yourself, using Continental’s stock symbol “CAL.”)
In coming days, you can expect the usual parade of executives touting the benefits and synergies of the merger. Don’t believe them. This merger is about them, not you.
Related posts from yesteryear:
- What will airline mergers mean to consumers?
- (Flashback to 2006) What’s in the cards for a United-Continental merger?
- (Flashback to 2008) Merger do-si-do: Continental spurns United, but other partners are ready to dance
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May 2nd, 2010 at 9:45 pm
Yuck. This merger really worries me. I’ve been flying with Continental as my primarily airline since I was a little kid. I have a Continental credit card and almost have enough OnePass miles for a free international round-trip ticket….I wonder how little things like that will be changed.
From a business perspective, it makes sense. I’ve been on many Continental flights when there are still open seats (in fact, I’ve learned to book seats toward the back of the plane to increase the chances of room to spread out — people don’t like sitting back there). I get that they want those seats to be filled. But I’ve also been on many jam-packed Continental flights, and quite a few behind-schedule ones. I am nervous about the notion of flights being cut back — I hope they are able to streamline routes without ruining the user experience and making us miserable. I’m afraid that you’re right, that it’s unfriendly to consumers, but I hope things don’t change too much.
May 2nd, 2010 at 10:54 pm
[...] to lose to Chicago and Newark. We tend to agree with Upgrade Travel’s Mark Ashley, who commented that if even if mergers mean that fares will increase due to reduced capacity and stronger market [...]
May 2nd, 2010 at 11:32 pm
Oh, how I hope this doesn’t mean United will, like Continental, play those disgusting non-silent advertisements after take-off. And I hope United pilots will not keep the seat belt sign as much as the Continental ones do and will continue to allow passengers to listen in on tower communications. Please, please, please.
May 3rd, 2010 at 12:03 am
a. When this merger occurs, I think it will be anticompetitive. Fewer airlines gives the remaining ones more pricing power, so the consumer will be paying higher fares. It seems that the only ones to benefit are the top executives with their pay incr.s.
b. Which airline has more 1K’s and million milers? It will make it more difficult to upgrade since you’ll be competing with more elite status fliers. All this is very disappointing.
May 3rd, 2010 at 11:15 am
Tons of ink will be spilled over this not-much-of-anything deal. My only question is what happens to Economy Plus. If it goes, so do I (to Frontier, JetBlue, Alaska, etc.).
May 3rd, 2010 at 1:03 pm
Twitter Comment
Great Analysis of the TRUE Winner of @unitedairlines @Continental (Ill miss that airline!!) Merger
May 3rd, 2010 at 1:05 pm
Twitter Comment
@RunwayGirl The execs will be happy for the rest of their lives, that’s for sure [link to post]
May 3rd, 2010 at 1:05 pm
Twitter Comment
Smart analysis of United-Continental merger: RT @upgradetravel R.I.P. Continental [link to post] #UACO
May 3rd, 2010 at 1:18 pm
One other thing:
I really don’t like the look of their new livery, just putting the United name onto the Continental colors (and font). I think the United colors were classier. But that’s not something most people will care about…
May 3rd, 2010 at 1:33 pm
A few other commentaries that I think are particularly worth reading on the merger:
Gary Leff’s predictions on what the merger will mean, practically, for frequent fliers on either airline:
http://boardingarea.com/blogs/viewfromthewing/2010/05/01/predictions-for-a-continental-united-merger/
Rick Seaney’s analysis of the merger, with some predictions regarding airfares, is well worth a read:
http://www.farecompare.com/articles/airline-industry-news/united-continental-merger/
Henry Harteveldt’s analysis of the companies’ reservation and operations backends, and just how much overlap there really is between the two companies’ customer bases, and what that means, going forward:
http://blogs.forrester.com/henry_harteveldt/10-05-03-continental_airlines_merges_united_proud_bird_soars_friendly_skies
May 4th, 2010 at 9:45 pm
[...] that would affect the way you travelPosted by: Mark Ashley All the attention has been on the Continental-United merger, but that’s not the only M&A action in the travel space. To [...]
May 5th, 2010 at 5:03 am
Too many people overlook the fact that enhanced airline profitability, even if it comes via reduced capacity the allows higher fares, is a good thing for consumers. Profitable airlines, in general, will provide superior and more reliable service, better stability, etc.
May 16th, 2010 at 2:11 pm
sure prices will increase…but I believe it’s better to have a strong & profitable airline industry that will last rather than lackluster & poor performing ones