A merger of equals?

It is thus not surprising that the Continental scheme and logo survive with the name United while the CEO will be Continental’s Jeff Smisek who will later assume the role of Executive Chairman upon the retirement of Glenn Tilton in 2012 or two years after the completion of the merger.

The merger joins Continental’s more than 2,700 daily departures serving 132 domestic and 137 international destinations carrying 63 million passengers a year from hubs at New York, Houston, Cleveland and Guam with United’s 3,400 flights a day to 230 US domestic and international destinations from its hubs in Los Angeles, San Francisco, Denver, Chicago and Washington DC carrying 81 million passengers.

While the press statement states that “the combined organization will draw on the talented group of leaders from both companies, with the combined company’s management team expected to include an equitable and balanced selection of executives from each company it is expected that Continental executives will fill key roles.

For the past 15 years, after several bankruptcies, Continental has been one of the airlines to show the US industry how an airline should be run by inspiring and incentivising its staff.

At the press conference to announce the deal Smisek encapsulated the essence of the deal well when he said; “This combination brings together the best of both organizations and cultures to create a world-class airline with tremendous and enduring strengths. Together, we will have the financial strength necessary to make critical investments to continue to improve our products and services and to achieve and sustain profitability.”

It is a merger that has great promise and it certainly promises to stop the demise of United Airlines, which has struggled to gain altitude since its prolonged Chapter 11 restructure.

The combination of United and Continental brings together the two most complementary networks of any U.S. carriers, with minimal domestic and no international route overlaps. The combined company will have 10 hubs, including hubs in the four largest cities in the US and promises to provide enhanced service to underserved small- and medium-sized communities.

Together, Continental and United serve more than 144 million passengers a year to 370 destinations in 59 countries and will have annual revenues of approximately $29 billion and an unrestricted cash balance of approximately $7.4 billion.

Both airlines have stated that it is believed the effect of the merger on front-line employees will be minimal, with reductions coming principally from retirements, attrition and voluntary programs.

Importantly the new company will adopt the Continental model and provide employees with performance-based incentive compensation programs focused on achieving common goals.
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In the merger, Continental shareholders will receive 1.05 shares of United common stock for each Continental common share they own. United shareholders would own approximately 55% of the equity of the combined company and Continental shareholders would own approximately 45%.

Importantly the merger is expected to deliver US$1.0 billion to US$1.2 billion in net annual synergies by 2013, including between $800 million and $900 million of incremental annual revenues, in large part from expanded customer options. One-time costs related to the transaction are expected to total approximately US$1.2 billion spread over a three-year period.
The merger, which has been approved unanimously by the Boards of Directors of both companies, is conditioned on approval by the shareholders of both companies and receipt of regulatory clearance and the airlines expect to complete the transaction in the fourth quarter of 2010. During the period between signing and closing of the merger, the CEOs of both companies will lead a transition team, which will develop a specific integration plan.

The deal that is expected to gain regulatory approvals will certainly spark the urge to merge around the globe but perhaps a better option for airlines is either join an alliance or to strengthen existing alliances for history has shown that mergers tend to be rocky affairs.

Continental and United’s positions are complimentary with virtually no overlap which is why they are both in the Star Alliance. Continental wants greater critical mass and United needs a savior with excellent labor relations credentials. For most United employees, this will be a takeover by the countries best legacy airline, a takeover they should welcome.

If the merge works it will create a great airline.