It’s been reported that United Airlines and Continental are at an impasse in their merger talks over how shares of each company would be valued in a transaction.  Essentially there are several ways a price can be set on a share and much of it depends on the day or date they agree upon.  For more on that complexity, you can read THIS.  The short story is that United favors  a methodolgy to their advantage and Continental favors a methodology to theirs.  No big surprise except that whatever is decided can affect the value of the deal to certain shareholders by millions.

Oddly enough, my concerns about this merger don’t get past the several other issues.  Rumour has it that the agreement has Jeff Smisek (CEO of Continental) becoming CEO of the new company and Glenn Tilton becomes non-executive Chairman.  The new company retains the United brand and remains in Chicago.   My question is why?

United is an inferior brand to Continental among the favored high revenue passengers.  It’s name recognition abroad isn’t so much greater than Continentals that that is a good reason.   And why would anyone want the costs of being headquartered in Chicago?  Continental has a nice HQ down in Houston where they control an airport and in a right to work state. 

Most importantly, Continental has good relations with its labor unions and United has abysmal relations with its unions.  Why would you want to preserve a status quo that sees United labor taking over with seething resentment? 

The Delta / Northwest merger did result in a company that was valued more than its two separate companies.  That new company has not yet made a profit.   Bigger equals better has not really yet been proved in that merger and they managed to accomplish it by taking care of labor issues (or at the least the dealbreaker labor issue) first.  And only then with the assistance of a pilot’s union chairman (Lee Moak) who “got it” when it came to what the airline industry is today. 

There is no evidence that the labor unions of either company are going to be happy about this.  How do you think Continental labor is going to feel about being taken over by the Bitter Unions of United?  Not good I suspect.   What is Continentals management team going to think of having to move to Chicago and deal with the mess that is United? 

It almost seems as if Continental is suffering from an inferiority complex.  There is no need for this merger on their part and there is no need to entangle themselves with a company that hasn’t got a single good thing going for it as it is.  Yet they appear willing to submit themselves to a fading airline glory who hasn’t done much right in the past 20 years. 

United’s shares are up since the merger rumours about it has started.  Considerably up.  Continental’s not so much.  There is a message there.  United’s owners see hope in a good company like Continental being mated up with their jalopy of an airline.  Continental’s owners don’t seem all that thrilled with the idea.  This isn’t potentially increasing the shareholder value for Continental’s shareholders.  There is no guarantee that this marriage will result in a company valued more than its parts.   There isn’t any concrete evidence that this will result in a profitable company.  Isn’t time we be concerned a bit with airlines being profitable rather than shareholder value rising temporarily anyway?

I’d actually feel more positive about a merger if Continental took over US Airways instead.  This potential merger just smells bad to me and it feels like no good can come from this.

Filed under: Airline News by ajax