It’s an age-old romantic adage that opposites attract, but perhaps that same expression can be used to describe the merger of two of the US’s biggest airlines – United and Continental. Not only did the tie-up in 2010 create the world’s largest airline by passenger traffic, it also brought two different global route networks together which afforded so many potential synergies that CEO, Jeff Smisek, described it as a “match made in heaven”.
Just over a year on and the ‘new’ United is making full use of those opportunities, with a combined fleet of 708 owned or leased and 547 regional aircraft under contract operating 5,800 flights a day to 371 destinations. The carrier has retained its 10 hubs, eight of which are in the US, including Washington Dulles, Chicago O’Hare and Houston’s George Bush Intercontinental, from where it can leverage an envious set of aircraft, slots and resources to maximum effect.
Operating over 900 routes globally, United is also on the hunt for new routes and services, not least to Latin America and the Caribbean, as Brian Znotins, United’s Managing Director of International Planning, explains. “The merger has brought together key strengths of the Continental and United subsidiaries which makes the new airline even stronger in the region,” says Znotins. “Continental brings its route presence and strength in Latin America and United brings hub presence in key US cities with large Latin American populations, such as Chicago, Los Angeles and San Francisco.”
From San Francisco and Los Angeles, United has launched new services to Guadalajara, Leon and Durango and increased frequencies on existing routes, for example from San Francisco, Los Angeles and Chicago to Mexico City and Cancún, among others, Znotins explains.
“The merger has also allowed the two carriers to better deploy aircraft across the network – in one case, the availability of United subsidiary wide bodies allowed an upgrade of the Houston–Lima route to a B767 – which is something Continental long wanted to do but didn’t have the available aircraft,” he adds.
United currently offers seven destinations in South America and 10 in Central America, with a new daily New York–Buenos Aires service beginning in April. The regional network is further complemented by through services from partners Copa and Avianca-TACA and fellow Star Alliance members such as TAM.
Continental’s existing hub of Houston remains a key feeder point for services to Mexico, Central and South America and the islands of the Caribbean. Elsewhere in the Americas, United operates a number of flights to Canada and offers access through fellow Star Alliance partner Air Canada to onward domestic and transatlantic links.
In the US itself, United inherited eight hubs, including Chicago, its home base, Washington Dulles, Cleveland and Newark, giving it such comprehensive coverage from East to West coasts that the carrier has so far tweaked its network rather than radically overhaul it.
In November 2011, United launched daily services between Houston and Lagos, Nigeria, the first time these two centres of the energy industry have been connected and a clear indication of the ambition of the carrier. “Five years ago there were no flights linking the African continent and North America by US airlines. Indeed, you could count on one hand the number of flights to Africa, you could almost say there were no flights at all, I think SAS and Royal Air Maroc had one, so if you are sitting in Nigeria, or Ghana or Angola or Kenya, to fly to the US, even today, 90% are transiting through Europe to get to North America – there is a market there,” explains Charles Duncan, United’s VP for Transatlantic, Middle East and India Sales.
In December, United continued its expansion drive with the announcement of a new daily service from its Washington Dulles hub to Doha, Qatar, via Dubai, from May 1. Doha will be the fourth city in the Gulf region served by United from Washington Dulles, in addition to Dubai, Kuwait City and Bahrain, meaning the airline serves more destinations in the Gulf region and Middle East than any other US carrier.
Meanwhile, in Europe, the UK remains a key market for United and the merger has given it an unprecedented level of coverage, both from its transatlantic base at Heathrow and regionally. “What is very unique is that Continental has pursued very much a regional strategy, serving Glasgow and Edinburgh in Scotland, Birmingham and Belfast and Manchester and Gatwick before Heathrow; that’s the Continental legacy if you will,” explains Duncan. “United bought the Pan Am’s access to Heathrow in 1988 and has been exclusively operating Heathrow, so now we have a combination of south east presence and a regional element and you put those two together and it’s really powerful.”
When the two airlines merged, they also combined their respective order books for the Boeing 787 Dreamliner. Its importance was underlined when Smisek described it as the “a game changing aircraft” and for Duncan and Znotins it simply can’t come quickly enough. “Initially, we will route the aircraft domestically through most hubs. We will, of course, use the aircraft for long-haul, international missions and will be announcing where we will first fly them as we get a bit closer to delivery,” says Znotins.
The B787s attributes include its ability to make an unprofitable route viable. It’s a formula ANA has embraced and one United is also pursuing. “The first route will be Houston–Auckland, it’s actually a long thin route, but there are a lot of connections at both ends and when we launch it will be the fastest route between London and Auckland via Houston, and in our forecast we expect a significant percentage of passengers, I mean in the teens, to be from Europe and that’s the kind of market that would not work on the technology before,” says Duncan.
“The reason I say we don’t have any UK specific plans is that the UK and US are close together relatively speaking, not like the Houston–Auckland market case, that existing aircraft have the range to serve all the points, but I guess in theory Honolulu–UK might be feasible in this aircraft. We don’t have any plans for that but to give you an idea what might happen with this, it will connect places,” explains Duncan.
But the 787 is not the only aircraft United has on order, as Znotins reveals. “We expect to take delivery of 19 new B737-900ERs in 2012 and they will be used to replace older, less fuel-efficient aircraft in domestic and shorter international routes. Looking further ahead, we have 25 A350s on firm order, which will be deployed on long-haul routes to replace older aircraft, such as the 747-400.
Having been granted a single operating certificate by the FAA late last year and combining its frequent flyer programmes in January, the new United has achieved two of its three major milestones for integration, with the final hurdle within sight, says Duncan.
“The final big milestone will come in the first week of March when we merge our passenger servicing systems (PSS) into a single platform. Once that’s done all the real heavy lifting is over and then we will be able to sunset the Continental name from reservations code systems and ticketing stock. By the spring and into the summer there really will be no trace of Continental and United as separate entities, which is quite exciting, creating the world’s biggest and best airline,” he says.
United has estimated that through expanded customer travel options, fleet optimisation and other efficiencies resulting from the merger, it will be able to achieve $1 billion to $1.2 billion annual synergies by 2013. On a pro forma basis, United Continental Holdings believes it will generate annual revenues of $31.4 billion, based on results for the 12 months ending June 30, 2010.
Just as is true of all airlines, of all United’s major challenges, fuel remains the greatest and is the carrier’s biggest expense, Znotins explains. “Fuel is our largest expense. For us to have a viable business, increased fuel costs need to be passed on to consumers. We have initiated or matched a number of fare increases or fuel surcharges in the past year as we attempt to price our product to reflect our higher costs. As a result, as prices go up, we often need to reduce capacity, to reflect the lower demand, and in response to reduced profitability of flights incurring high fuel prices,” he says.
In the short-term the airline is using hedging to help to protect itself; in the long-term it hopes to reduce fuel through more fuel-efficient aircraft, a modern air traffic control system and the use of biofuels. A new challenge which United must now tackle is its long-term response to the inclusion of aviation in the EU Emissions Trading Scheme (ETS).
“We believe that because of the international nature of aviation, its environmental impact cannot appropriately be addressed by a unilateral regional scheme but instead requires a global solution, which we have been consistently advocating as the global sectoral approach to be managed by ICAO,” Znotins points out.
With the opportunities offered ban extensive route network, one of the world’s biggest fleets and the synergies brought from a single operating certificate, the United honeymoon will no doubt continue for some time.
This story appears in the latest issue of Routes News, which can be read here Routes News 1. A copy of the world air service development magazine is also in all delegate bags at Routes Americas.
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