Thursday, December 14, 2006

The shotgun marriage of Continental and United

Although in this case, the bride (United) is the one holding the shotgun. Most of you have probably heard the rumor news by now about the potential merger. If you want more detailed background, Tom's got it. I'm not going to repeat the media stories, but instead speculate on reasoning and, should it go through, headquarters (Houston vs. Chicago). I will admit right up front that I called for this merger in a Chronicle op-ed at the end of 2002, right after United declared bankruptcy. The routes and hubs are very complimentary and make a lot of sense: United in Asia and the West/Midwest, Continental in Europe, Latin America, and the East/South. Continental would get access to restricted London Heathrow. Both have a lot of high-end business traveler traffic. The hubs include a who's who of America's top world cities: New York, DC, Chicago, San Francisco, Los Angeles, and- the newest addition to that group IMHO - Houston (non-world-city hubs include Denver and Cleveland). That company alone would be a nice boost for Houston's national and global reputation.

The first question is why this is happening now, when neither Continental nor United have seemed all that interested in the past (airline mergers are messy, complex, painful things) - and CAL CEO Larry Kellner has even stated his preference for staying independent. People are pointing to the USAir-Delta merger proposal, and it is definitely part of the equation. The simplest way for me to describe it is a simulated UAL-CAL conversation (you can imagine it between the CEOs Tilton and Kellner if you like).
  • UAL: Life's hard. I'm being attacked from all sides. Southwest and JetBlue in DC. Frontier and Southwest in Denver. Virgin America in SF. Southwest in LA and Chicago. I want to get married and make this somebody else's problem before bankruptcy #2 hits.
  • CAL: Uh, yeah, good luck with that.
  • UAL: You're not interested?
  • CAL: No thanks. I'm a happy bachelor.
  • UAL: Oh well, I guess I'll make a play for Delta instead then. They'll have to love me if they want to get away from USAir. I'll be their knight in shining armor.
  • CAL: Whoa, whoa, whoa there! If you marry Delta, then I'll have to merge too to stay competitive, and my options will be Northwest (yuck) or USAir (double yuck). Bad airlines, old planes, second-tier hubs, and major labor unrest.
  • UAL: Hmmm, yeah, good luck with that. See ya later... I've got a ring to buy and a proposal to make.
  • CAL: Hey, wait a minute. Maybe we should talk first...
See what I mean about the bride holding the shotgun?

I'm sure the question on most of my readers' minds is, "If this thing goes through, where will the headquarters end up? Chicago or Houston?" It's a mixed forecast there. Of course, I'd love to see the headquarters end up here - and hope that the City and the Greater Houston Partnership lobby as strongly as they can on that. One very helpful point in our favor is that Continental's management is widely regarded as superior to United's, so that's very favorable to Houston. But here's the problem: from a pure business perspective, Chicago is the better choice. United and American have similar size hub operations at Chicago O'Hare. Each is always looking for an advantage over the other, and United's advantage is that it's the "hometown airline" - vs. American out of Ft. Worth. That carries some weight with fliers in Chicago. On the other hand, Continental essentially owns Houston, whether the headquarters is here or not (the IAH hub is obviously not going anywhere). If I had to guess, I could see the major operational headquarters (and most of the jobs) ending up here, to take advantage of Continental's strong management and operations, but a very thin, symbolic top executive headquarters with few employees will end up in Chicago - very similar to Boeing in Chicago or Exxon in Dallas. One indicator of this potential direction is that Tilton recently announced the movement of the United top executive staff out of United's operations center/HQ in Elk Grove to a downtown Chicago office building (while leaving operations in Elk Grove). Maybe he's looking ahead?

Update: Just found this Chicago Tribune article:

Meanwhile, United and Continental's merger talks, described as preliminary, appear hung up on the issue of which management team would lead the combined company, said a person familiar with the negotiations.

That's a crucial issue that has some civic leaders on edge since it could determine where the airline's headquarters is based. For now, United still plans to move its headquarters to downtown Chicago early next year, said a spokeswoman.

The airline hasn't talked to city officials about if or how consolidation would affect the high-profile move, which United announced this summer in exchange for millions of dollars in federal and state aid.

"It's always a nervous thing, but this city gives them the whole world, and Houston does not," said Paul O'Connor, executive director of World Business Chicago, a non-profit group that promotes economic development in the city. (I'm just going to let that one go - chalk it up to ignorance and bias.)

The two airlines have talked several times about joining forces over the past decade. However, Continental's previous overtures to United and CEO Glenn Tilton faltered after the two disagreed on management control, sources said.

United is the second-largest U.S. carrier, while Continental ranks fifth. Even so, Continental CEO Lawrence Kellner wouldn't be content to play second-fiddle to Tilton, say people who know him.

"Remember, these guys have big egos," said Tom Buffenbarger, international president of the International Association of Machinists and Aerospace Workers, which represents ramp workers and gate agents at United and flight attendants at Continental. "Glenn Tilton is an oilman. It would be a battle of Texas titans."

Pretty much the entire business world realizes Continental has the superior management team. If Tilton is obstinate, Kellner should turn the tables by raising private equity (relatively easy right now) and launching a hostile offer for United on Continental's terms. Tilton's been publicly wishing for industry consolidation for a while now, which reminds me of the saying, "Beware what you wish for. You might just get it good and hard..."


At 9:33 PM, December 14, 2006, Anonymous Anonymous said...

Could Rick Perry use his business incentive package ($300 million slush fund as Strayhorn called it) to help keep the HQ in Texas given a merger or is that limited to corporate relocations?

Hopefully CEO speak isn't like athlete speak. "I want to play close to my family" actually means "One extra dollar and I'll play in Outer Mongolia". Does Kellner saying that he wants to keep Continental in Houston = "Slash and burn employees in Houston so that United won't face bad press in Chicago when we merge"

At 9:39 PM, December 14, 2006, Blogger Tory Gattis said...

State incentives are definitely possible, although, of course, Chicago and Illinois will come up with their own too.

I would imagine Kellner is super-protective of the Houston employees. I'm not sure there would be all that many layoffs in any case.

At 12:59 PM, December 18, 2006, Blogger Adam said...

State incentinves, that'll make it work! Oy.

Count this tax-and-spend liberal out for that idea :)

But what if somebody got a Continental/Houston stalking horse offer together: That would have an investor talk about private equity that aimed not for a merger, but just assembling the profitable assets of United, scrapping the rest, dumping the management, and handing to Continental and Houston. Then, that idea could become a conversational topic, and United neogtiator/planners would have to meet expectations that they would do somehting like that :)


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