While today’s shareholder vote on the merger between United Airlines parent UAL Corp. (NASDAQ: UAUA) and Continental Airlines (NYSE: CAL) is expected to go down without a hitch, the real unknown is how the how two super-giants will make the billion-dollar transition to one mega-giant.
Airline customers aren’t expected to notice changes for at least six months, with it possibly taking two years for the complex details to be finalized. The move won’t be an easy one, with huge labor forces and operations to navigate, coupled with complex financial structures. The merger will yield the largest airline in the world, besting current leader Delta Airlines (NYSE: DAL).
Both airlines are estimating that operations will fold together sometime in spring on a day they’re dubbing “Customer Day One” – when new signage everywhere from the planes to employee uniforms will greet passengers (a mix of United’s name with the Continental logo). And, while increase in fees aren’t expected, customers will see changes to the website and online ticket purchasing.
United and Continental together have 10 hubs, though there has been industry speculation that some could go –the name that’s been floating around is Cleveland. Earlier this week, the pair agreed the Cleveland hub would remain at reduced size, with a payout of $20 million if in the next five years it’s shut down.
Other details are yet to be worked out. The airlines have been so far mum on the future of the worldwide United Red Carpet and the Continental Presidents clubs, or whether United’s Mileage Plus or Continental’s OnePass will continue or be revamped. The two currently have an estimated 90 million frequent-flier members.
However the transition happens, the end result is a gain for both airlines. By 2013, the newly formed company is banking on some $300 million in savings and an increased revenue of $900 million more a year than current numbers together. It would generate about $30 billion in revenue a year from carrying some 144 million passengers to 370 destinations. At the same time, debt maturities for the two companies together could total $2.9 billion next year.
Continued positive news about the merger is coming at a good time for the pair, as the industry moves to rebound from a crushing couple of years. CAL is up +30% year-to-date against the Dow and S&P 500. The company in July reported $233 million in second quarter profit ($1.46 diluted earnings per share), its highest second-quarter pretax profit since 2000.
United, meanwhile, is up +71% year-to-date against the Dow and Nasdaq – also giving investors something to smile about. In July it reported its first quarterly profit since 2007, with a second quarter net profit of $430 million ( $1.95 per diluted share), a $751 million improvement from the same quarter last year.
The move should also help with United’s customer reputation, which ranked No. 11 in a 12-carrier analysis by USA TODAY analysis. Discount and smaller carriers JetBlue (NASDAQ: JBLU), Southwest (NYSE: LUV) and Frontier rank among the top airlines in terms of quality and service.
Final papers will be signed Oct. 1.
As of this writing, Burke Speaker did not own a position in any of the stocks named here.
