As with most mergers, the announcement this week that United Airlines was joining forces with Continental Airlines to become the world's largest airline touted all of the benefits of the combination: Complementary routes that will give consumers more choice and flexibility; scale that will provide cost synergies; and resources that will allow for strategic investments. Continental's CEO (and CEO-designate of the merged company), Jeff Smisek, even said that "putting these two carriers together is a match made in heaven."
Unfortunately for Smisek and Glenn Tilton, United's CEO, making the "match" is a lot different than making the "marriage." Even assuming that the merger is given regulatory approval (which is not a sure thing), the integration process will be extremely challenging. And even if the integration process is smooth, there is still no guaranty that "bigger will be better." After all, there are plenty of examples of large industry-consolidation deals that did not pay off as expected (e.g. Pfizer and Warner-Lambert; Sears and Kmart). And the airline industry is fraught with unique structural issues -- such as fluctuating fuel prices; pressure to limit environmental impacts; and reduction in business travel -- that suggest size alone may not be a determinant of success. (See my earlier blog post "Rapid Disruption's Next Victim.")
Given these challenges, what can Smisek, Tilton, and their teams do to improve the odds of success? Here are a few suggestions:
1. Get past the happy talk. OK, everyone gets that United and Continental are a good strategic fit; now it's time to discuss all of the tough issues that will need to be worked out over the coming months. This merger, like all others, has many constituencies -- consumers, employees, unions, communities, managers, shareholders, suppliers, and partners. While the merger might be positive for some of these groups, it will not be good for everyone. People will lose jobs or have to work in different ways; routes will be changed; fares could go up; regional services might be truncated; and suppliers might be consolidated or forced into price concessions. For the new leadership team to be credible, and to win the backing of all the stakeholders, these issues have to be faced candidly and constructively as soon as possible. And yes, it's fine if management doesn't know all of the answers right now -- but it will be important to know when and how they are being addressed.
2. Focus on better rather than bigger. Yes, there are advantages of scale. But scale alone hasn't made either of the companies (which are currently two of the four largest carriers) successful, or even profitable, until now. So while putting the two airlines together will improve the financials in the long term, the real key to success is to use the merger as an opportunity to step back and reinvent business models and processes. In other words, during the course of integration, the two companies will need to combine all of their operating processes -- advertising, loyalty, check-in, maintenance, baggage handling, and everything in between. If the focus is only on how to do these processes more cheaply, the gains will be incremental at best. On the other hand, if the focus is on how to create at least some game-changing breakthroughs then the new airline might make real money.
3. Create a customer-centric culture. Combining cultures is always a challenge in merger-integration. With United and Continental it might be the difference between success and mediocrity. While not perfect, Continental has worked hard for a number of years to build a service-oriented culture and a reputation for putting the customer first, and it has climbed in the airline quality rankings. United has struggled to do this, particularly in the face of contentious internal labor relations, and is ranked much lower for overall quality. For the new company to be successful, management will need to build on Continental's experience and become even more customer centric.
In short, this "match made in heaven" is not a foregone conclusion and will take lots of hard work. Let's hope that the United and Continental management teams are up to the challenge.
What are your suggestions for making the United-Continental merger a success?
Cross-posted from Harvard Business Online
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