In the Cleveland Plain Dealer, Continental President Jeff Smisek was quotes as saying that Continental may re-visit the idea of merging with United Airlines in the future.  The story can be read HERE.

Continental has experienced a rather rough dip in unit revenues over the past year even compared to other US legacy airlines.  The airline was much more devoted to the business traveler (particularly in the international segment) and the decline in business travel has hurt it more than some other airlines.   A merger with another airline could help Continental diversify its revenue sources and experience synergies much like the Delta/Northwest merger appears to be providing that mating.   To date, Delta / Northwest has not been profitable but it does appear to be weathering the economic recession in the airline industry quite well and its new found flexibility with both equipment and passengers seems to have benefited the airline.

However, I didn’t like the idea of Continental merging with United in 2008 and I don’t like it now.  United is saddled with a lot of debt, an angry labor pool and aging aircraft.  Continental, on the other hand, is much the opposite.   While Continental has a well trained management corps and their own employees are much happier, I don’t see what United brings to the table that they can’t already develop on their own over time.   The Denver hub would be of little value to Continental and is already a battleground between two LCC carriers and United.   United does have the better system over the Pacific but lacks the aircraft to modernize it while Continental has the better product for Pacific travel, it doesn’t have the spare equipment to spruce up those routes to compete against the likes of Delta/Northwest. 

To me, it seems that Continental would benefit more from smaller, more tactical mergers that dovetail more closely with their service and aircraft fleet.  Alaska Airlines is one partner that, in my opinion, would be an excellent fit for Continental.  It would give them an West Coast route structure, a fleet that meshes (mostly) with Continental’s, an employee group already accustomed to be treated well and a management corps that is doing remarkably well and which could augment Continental’s own management leadership nicely.    Even more important, Alaska Airlines is profitable at present.

The next best strategy for Continental is to start planning for the future.  They have a number of new long haul aircraft due over the next 4 years and despite how everyone feels in the airline world, this recession will be over someday in the future.  Continental could capitalize on their strengths and aircraft fleet by targeting United Airlines and its Pacific destinations for 2011 or 2012.  By selectively targeting United and US Airways, Continental could fair very well without taking on all the baggage any other legacy airline has to offer it. 

Joining up with United Airlines really doesn’t offer Continental much that it can’t already achieve except the Chicago hub for both domestic and international flying.  Continental’s Cleveland hub is a very distant second to United’s Chicago but I wonder if having that kind of market dominance in Chicago is worth the trouble of bad labor relations, old aircraft fleets and a group of executives that have shown themselves to be mediocre in everything they execute.   In fact, by joining the Star Alliance, I suspect that Continental will reap almost as much benefit with little trouble.

Continental’s new home in the Star Alliance is interesting to me in that Continental’s product seems to much more closely match that of other Star Alliance partners (Lufthansa, Singapore Airlines, Thai, Air Canada, Air New Zealand) than either existing US based Star Alliance member aka United Airlines and US Airways.   I suspect that member airlines will be quite willing to book more traffic on Continental for US domestic destinations than on United or US Airways.   If anything, US Airways becomes the odd man out and should begin considering finding a new home.  I’d suggest OneWorld.   Nonetheless, I’ll be monitoring Continental’s experiences in the Star Alliance for the next year as I do think it’ll make a positive difference in their fortunes.

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