Continental Airlines Merges With United -- The Proud Bird Soars Into The Friendly Skies

On Monday, May 3, two of the “founding fathers” of the US airline industry, Chicago, Illinois-based United Airlines (it of the iconic ad slogan, “Fly The Friendly Skies”) announced a "merger of equals" with Houston, Texas-based Continental Airlines (once known as the “Proud Bird With The Golden Tail”). The combined airline will form, at least for the time being, the world’s largest airline. At the time the merger is expected to close (that’s currently estimated to take place in Q4 2010), the “new” United will:

  • Have a combined fleet of 692 mainline aircraft (as of 3/31/2010)
  • Operate 10 hubs: Newark Liberty (EWR), Washington Dulles (IAD), Cleveland (CLE), Chicago O’Hare (ORD), Houston George Bush Intercontinental (IAH), Denver (DEN), Los Angeles (LAX), San Francisco (SFO), Tokyo Narita (NRT), and Guam (GUM).
  • Account for about 21% of the US available seat miles – a key airline industry capacity metric – and about 7% of global capacity.

 

Though the merged airline will keep the United (UA) name, it will use Continental’s livery and logo (CO). I’ve got to admit: Personally, I prefer UA’s “tulip” logo and livery to that of CO’s (though I don’t think anyone’s bought a ticket based on an airline’s paint job since Braniff’s “end of the plain plane” campaign).

A key outcome of this business will be United’s ability to better compete for corporate business -- the "bread and butter" of the airline business. The airline will pose a credible challenge to American Airlines (AA), Delta Air Lines (DL), and JetBlue Airways (B6) in the New York area. Continental’s IAH fortress hub will allow the expanded United to better compete for east-west traffic along the "Southern tier," as well as funneling passengers to Latin America. On the leisure front, Continental serves Florida, Mexico, and the Caribbean -- areas where United has traditionally been weak -- while United has extensive service to Hawaii.

Forrester’s Consumer Technographics data illustrates the challenge facing the combined UA-CO in preserving its business traffic. Forrester’s North American Technographics® Travel Online Survey, Q1 2010 shows there are generally more CO or UA business passengers who fly either AA or DL than occurs the other way around. For example, in the following table you can see that 20% of AA business passengers took at least one business flight on CO in the past 12 months, while 30% of CO business pax flew AA at least once.

(How to read this table: Each column reflects the percentage of US business travelers who flew the airline at the top and also flew each of the named airlines along the left.) 

 

American

Continental

Delta

United

American

--

30%

22%

27%

Continental

20%

--

18%

19%

Delta

35%

44%

--

42%

United

25%

28%

26%

--

Base: US online business passengers

Source: Forrester’s North American Technographics® Travel Online Survey, Q1 2010

As is the case in any airline merger, some of the most intense, complex, and important business challenges will be in the IT area. Neither airline offers a truly compelling website – the airline should take advantage of this merger to create something much more compelling to better compete against other airlines' websites and online travel agencies like Expedia, Orbitz, and Travelocity. However, Forrester has identified two distinctive IT/eBusiness strengths – one from each airline – that can meaningfully contribute to the merged airline's future success:

  • Continental’s customer data warehouse. Continental has built an impressive customer data warehouse that the airline uses for marketing, customer service, and operational purposes. It’s so impressive that as far back as 2003 Forrester cited Continental as a leader in travel CRM. This is definitely an asset that the merged airline should capitalize on given its potential to help it improve traveler loyalty, increase the consistency in which customers are served, boost marketing effectiveness through better targeting, and help the airline maintain good operational performance.
  • United’s digital merchandising capabilities. Regardless of how you may feel about the airline industry’s shift to “unbundle” its product offering and charge to check baggage and for meals, “ancillary revenues” now generate a significant portion of airlines’ revenues. In its Q1 2010 earnings statement, United stated that its checked bag fees and ticketing and change fees contributed to a 0.8% increase in passenger revenue per available seat mile (PRASM), a key industry metric. United has developed a suite of optional travel products, branded “Travel Options By United”(TOBU), which include the checked bag fees, day-passes to United’s Red Carpet Clubs, and access to priority security screening lines. United has integrated these into its digital channels, including its website, airport check-in kiosks, and mobile. While the execution is not always perfect, TOBU is clearly successful for United and should be incorporated into the merged airline.

 

As far as the reservations system goes, the airline should look beyond its incumbent systems. The central reservations system (CRS) is an airline’s nerve center, and is among its most important technology assets. The CRS houses, or “hosts,” the carrier’s schedules, inventory, and pricing information. The CRS may also interface with other applications like revenue management, departure control systems, and loyalty program databases.

United hosts on the Apollo system (part of Travelport) – a system United helped create in 1971 – while Continental hosts on Shares, a system created by EDS (now part of Hewlett-Packard following its purchase of EDS). A merged airline, of course, needs only one host system. But which system the merged airline will host on isn’t going to be a simple decision. 

In 2005, United inked a deal to move its CRS from Apollo to Amadeus. The airline’s rationale was in part based on its membership in the Star Alliance. Several Star carriers, including fellow founding member Lufthansa, host on Amadeus – indeed, the alliance has a strategy to encourage as many member airlines as possible to host on Amadeus to improve efficiencies and reduce costs. 

Meanwhile, last year, Hewlett-Packard announced the creation of a new Passenger Sales and Service System called Jetstream – of which American Airlines is the launch customer. 

Rather than make a decision to host on one of the incumbent systems – the usual approach in airline mergers – the merged airline should evaluate all relevant options, including Amadeus, Jetstream, Sabre Airline Solutions, and Travelport.

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Continental Airlines and United Airlines

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