Is this a logical conclusion or simply delusions of grandeur? Everyone is entitled to his or her own opinion after analyzing the results of the announced merger of United Airlines and Continental Airlines. Assuming that the Department of Justice and the shareholders of the two companies approve it, this transaction will create the world leader in aviation with annual revenues of nearly $30 billion, 692 airplanes, 144 million passengers per year, 370 hubs, and of course, global ambitions.
This alliance, full of superlatives the way Americans like them, has generated laudatory statements and comments from self-confident executives who claim it signifies the strength of the nation and its international reputation and that it fits perfectly with current globalization trends aimed at optimal profitability through synergy and economies of scale. Nonetheless, this remains to be proven.
The United/Continental marriage is in fact that of two giants with feet of clay, and there is no certainty that it will lead to profitability, no matter what anyone says.
All serious observers know that the aviation industry is not really profitable, that the financial results are mediocre at best and that it takes more than simply putting two ducks in the same pond to produce a tidal wave.
The level of sacrosanct synergy expected from this alliance is telling: a maximum of $1.2 billion per year. Compared to total sales, the percentage is modest. As for economies of scale, they are unlikely to impress Wall Street: considered separately, United and Continental, both giants, have already achieved them. Consequently, the merger’s result will be primarily to establish solid supremacy, with the associated reinforcement of the Star Alliance and perhaps certain difficulties for Airbus.
In 2009, the two partners had combined losses of $647 million, a figure not worth commenting on since it obviously relates to the recession.
The United/Continental fleet includes only 152 European aircraft (A320s) which will later be joined by the A350XWBs. But Boeing will be in home territory here, given the close links it has with the new entity. These links are anchored in US commercial aviation history, United being a creation of Boeing and National Transport.
The operation has been presented quite professionally, displaying perfect mastery of public relations techniques. The well-polished, five-page communiqué could be used by advertising schools as a case study of how to get every word just right in order to give the operation a positive, constructive and promising image.
In Europe, any similar alliance would be a complex puzzle or simply impossible. Can we imagine a merger of Air France-KLM and Lufthansa? In the US, the only rules are national, everyone speaks the same language and there is only one union for pilots and other personnel. Moreover, the only viewpoint that prevails is that of the executives, who are not particularly given to metaphysical reflection.
A rumor going around in the States hints at an attempt to merge American Airlines and US Airways. If such an operation takes place, the reorganization around a handful of mega-carriers and low-cost airlines will be complete. The low-costs in fact will have played a key role in justifying consolidation. Glenn Tilton and Jeff Smizek, the all-powerful bosses of United/Continental (only the United brand will remain) have emphasized that on US domestic routes, 80% of their competition is with Southwest and its emulators. That’s where the real challenge may lie. Experience has shown that dinosaurs are not immortal.
Pierre Sparaco-AeroMorning
Translated by Tim Bowler