The United and Continental Airlines merger is a temporary solution for survival in a terrible industry. Nonetheless, despite conventional wisdom, there is potential big money to be made in such unattractive sectors."This is a nasty, rotten business."
- Robert L. Crandall, former CEO & President of American Airlines
After years of off-and-on conversation, United Airlines (UAUA:NASDAQ) is getting into bed with Continental Airlines (CAL:NYSE) in a merger deal valued at $3.7 billion. The merged entity, keeping the United name, will be the largest airline in the world. It will have close to $30 billion in combined revenue, 700 aircraft, and service to 370 destinations in 59 countries, according to BusinessWeek. Early estimates predict savings to reach $1 billion to $1.2 billion annually.
Is a Merger Better Than Bankruptcy?
The deal makes a lot of sense, if only because the alternative was to lose more and more money. In an industry that is incredibly difficult, any means to reduce costs, take advantage of economies of scale, or improve productivity is desperately welcomed. (Mergers, in airlines and other similar struggling industries, often come down to one key reason- survival.)In case you forgot, let me remind you of how bad off these companies were... and still are (but hopefully to a lesser extent). The better-run airline, Continental, has declared bankruptcy twice, had to borrow money from the U.S. government, and has lost over $1 billion since Sept. 11.
United has had an equally unimpressive past, with its own extended bankruptcy, ongoing (contract) tensions with labor, elimination of its huge pension plan, and many failed strategies (do you remember Ted?) and merger attempts.
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