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Posted May 18, 2010 5:04 AM
By Paul Sheridan

United and Continental - how will they fly together?

Consolidation in the aviation industry has long been more a topic of conversation than a reality but slowly (often very slowly) it is starting to happen, at least in Europe and the US.

Over the past 10 years we have seen few successful mergers and some notable failures. The multiple collapses of the United and US Airways merger and of the BA and American Airlines cooperation highlighted the difficulties that airlines encounter when trying to get closer. The success of Lufthansa/Swiss and Air France/KLM gave a good European model and managed to deal effectively with national sensitivities and created successful merged entities. It is no surprise that BA and Iberia are following a similar model.

In the US the lack of compatible networks has limited the options for most airlines. The example of United and US Airways also highlights the dangers of a failed merger. The distraction created by efforts to merge helped to usher both companies into bankruptcy during the last slump. While various combinations of airlines were mooted in the years that followed it wasn’t until Delta and Northwest merged, and did it successfully, that US airlines were forced into action and now we see the first response in the form of the United and Continental merger.

The figures for the new United Airlines are certainly impressive; they will create an airline with $29bn of revenues, more than $7bn in cash and nearly 700 aircraft. Just as impressive however will be the effort required to overcome the hurdles that will be put in their way. The regulatory process promises to be painful as it involves 15 states and getting agreement from all employee groups will always be difficult. These will threaten the ambitious timetable for closing the merger before the end of the year and will make the merger negotiations look easy. Finally there is always the risk of a merged company ending up with the worst service aspects of both parties.
 
Overall the merger will test the strengths of the two airline’s management teams. Will they end up getting their $1bn of synergies per annum or will they end up with an unmanageable airline? For aircraft investors there are still a number of uncertainties namely:
 
·         There are lots of old aircraft in both companies and so what will the merger do to 737 Classic storage and what will this do to values? Investors in older and distressed aircraft will be waiting for the new fleet plans with great interest given how starved of deals they have been over the past two years.
·         Both airlines are big users of the 757 and their plans for this aircraft will be crucial to its future value.
·         Which aircraft planning team will they keep? Given United’s split between Airbus and Boeing’s widebodies but Continental’s Boeing only policy this could be making people in Toulouse nervous.
·         What does this mean for the A320 Family? A lot of people speculated in the downturn that it was going to be their willingness to place aircraft with lower credits that came back to haunt Airbus, but could we see an event where a US flag carrier puts several aircraft down?
 
It is unlikely that all of these events could happen at the same time, e.g., if the combined airline has a clear preference for younger aircraft then the A320s should be retained but classics will be rejected. However, at least one of the scenarios above should happen in some form. The impact of the merger on values is going to be on the downside for the aircraft that get rejected but, unless there are major surprises in the fleet plan, the downside will be limited. We await this plan with interest.

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