Creating the world’s largest airline sounds like the dream of any businessperson with an aviation obsession. For United Continental Holdings Inc (NYSE:UAL), however, the dream has become a nightmare at times, as merger troubles overshadowed the airline’s integration process. With United Continental shares underperforming most industry rivals, can it teach investors any lessons about the perils of airline mergers?
Smooth flight (was) expected
After a successful merger between Delta Air Lines, Inc. (NYSE:DAL) and Northwest Airlines, 2010 looked like another year for airline megamergers. United Airlines and Continental Airlines announced their all-stock merger (the Delta-Northwest merger and the proposed US Airways Group, Inc. (NYSE:LCC) /AMR Corporation (OTCMKTS:AAMRQ) merger were/are all-stock as well). The deal would form the world’s largest airline, with a massive network and a fleet to match.
Billions in cost synergies were bandied about, as the two major carriers dreamed of cutting out waste and realizing economies of scale in an industry with traditionally thin margins. Soon after the merger, however, turbulence began, and United Continental Holdings Inc (NYSE:UAL) shareholders were along for the ride.
Technical glitches mean unhappy flyers
It’s difficult enough for offices to merge email systems, so the integration of major airline reservation systems represents what can only be described as a monstrous technical challenge. Unfortunately, this was a major stumbling block for United Continental Holdings Inc (NYSE:UAL), drawing plenty of press coverage.
Whether it was making reservations more difficult, slowing down the process, or just plain crashing, the reservation system integration became a major issue at the airline. The problems managed to link the United Continental Holdings Inc (NYSE:UAL) merger with flight delays in the public’s mind. For a feeling of just how much the press hammered the airline over this, check out these headlines.
- United’s Computer Chaos – The Economist
- United’s Merger Turbulence Hits Elite Frequent Flyers – The Wall Street Journal
- United Airlines still hearing complaints after merger swtichover – USA TODAY
- United-Continental airlines merger hits turbulence – The Minneapolis Star-Tribune
Last month, the airline was fined $350,000 for delaying customer refunds. Not too surprisingly, United Continental Holdings Inc (NYSE:UAL) blamed the issue on merger trouble.
As a merging megaairline, United Continental Holdings Inc (NYSE:UAL) was expected to be an earnings powerhouse, with annual earnings approaching $6 per share. Various merger costs have prevented this from happening, however, as the airline now fights to make half that amount.