In an industry where mergers are shaking up the very structure of airlines, United Continental Holdings Inc (NYSE:UAL) has proved to be no exception. Formed by combining United Airlines and Continental Airlines, the merged company currently fills the role of the world’s largest airline on many fronts. While the merger was intended to save more than $1 billion a year upon its full completion, United Continental has not yet recognized these savings. Here we will take a look at the future prospects of this mega-airline.
One good merger needs another
In 2008, Delta Air Lines, Inc. (NYSE:DAL) and Northwest Airlines both exited the bankruptcy process and announced their intent to pursue an all-share merger. Northwest shareholders would get 1.25 Delta shares per Northwest share, and the new airline would become the world’s largest under the name Delta Air Lines.
Both United and Continental recognized the benefits that could be realized through airline integration, and pursued on-and-off merger talks before finally reaching a deal in 2010, giving Continental shareholders 1.05 United shares per Continental share.
However, the United-Continental merger has been encountering airline-merger turbulence over the past few years. Instances of computer glitches and reservation-system crashes have left passengers angry, while integration costs made United the only major U.S. airline to post a loss for 2012. And even so, the two carriers are not fully integrated yet, leaving investors to wonder whether United Continental Holdings Inc (NYSE:UAL) will eventually take off again.
When savings outweigh costs
No one ever said merging two multibillion-dollar airlines would be easy. Airlines have their own cultures, their own systems, and their own unexpected surprises. Reconciling all these differences will inevitably cost time and money upfront to realize benefits later. Delta experienced a similar pattern with its Northwest merger, as US Airways Group, Inc. (NYSE:LCC) did with its 2005 America West merger. Today, Delta is flying as an integrated airline and US Airways, despite not having unified its work rules, has been able to post profits and is pursuing a merger with American Airlines.
It is important to realize that merger-related costs are not recurring expenses. Some of United Continental’s costs related to things such as a pilot’s payment agreement and the repainting of aircraft. Presumably, once the aircraft are painted in the new United Continental colors, they should not need to be repainted any more often than if no merger had occurred.