Continental Airlines today announced that it was leaving SkyTeam to join Star Alliance. This comes a few months after speculation that United (a founding member of Star Alliance) and Continental were considering a merger in response to the Delta-Northwest merger.
The Doctor, who is well-connected within the airline industry and has been hearing about these discussions from various levels of middle management at several of the afforementioned airlines, is not at all surprised by this announcement. Nor was I surprised when Continental spurned United's overture to merge.
My sources had told me that all of the higher-level executives at both Continental and United had buyout clauses written in to their contracts regarding what would happen should those two airlines ever merge. In 2006 it had sounded like both sides might have been close to some kind of agreement, although there seemed to be confusion regarding who would be taking over whom. According to the Continetal people I had spoken with, who admittedly were much further down on the totem pole and were definitely not in the boardroom or on any conference call when such a merger was discussed, part of the hang-up at the time seemed to be United's refusal to adopt the Continental banner and relocate to Houston. Regardless of how the deal was legally defined or financially arranged, to the general public that's a sign of defeat. Those same sentiments were echoed by many in the Northwest with regards to the Delta merger, which to the average bystander seems more like a takeover by Delta.
Earlier this year when the United-Continental talks were supposedly heating up again I was advised by several Continental employees that such a merger was highly unlikely. For one the corporate culture at both airlines is quite different. Despite having a reputation as a union-busting airline (the very reason why many labor activists such as Michael Moore refuse to fly them), Continental actually had very high company morale. Its profits and load factors were the best amongst the US legacy carriers, and people within the company generally seemed to treat each other with respect. It ran a tight ship at its headquarters in Houston, and as an industry insider I can tell you that whenever you needed to get something done with Continental, well then it would get addressed. Not necessarily done, but at least addressed. That's a moral victory in this industry.
United on the other hand is a horribly run airline. Morale seems low at every level, especially among the rank-and-file frontline staff such as flight attendants, gate agents, etc. All departments seem to be completely disconnected with each other and sometimes getting a hold of anybody, let alone the right person, seems to be nearly impossible. At some point I'll share my own personal experience regarding a Washington-Boston flight that was diverted to Manchester, NH and my not-so-funny efforts to collect my frequent flyer miles and receive compensation for the routing change. But I digress...
Anyway, the term "different corporate cultures" was constanly mentioned by sources at Continental as being the lead impediment to any supposed Continental-United merger. From a financial side it made no sense to combine what was the most profitable US legacy airline (Continental) with one that had been in and out of bankruptcy protection 3 times over the past 10 years (that would be United).
That being said, there were certain logical overlaps between the two airlines, most notably with route networks. United has a weak presence in Latin America, which is one of Continental's biggest strengths. United also has been unable to really make a dent in the crucial New York area marketplace, with service being limited to its other hubs such as San Francisco, Los Angeles, Chicago, Denver and Washington.
The crucial NY-London market is a prime example where United failed in the Big Apple. It gave up on both its JFK-Heathrow as well as Newark-Heathrow flights a few years ago, which were never going to be competitive in a marketplace already crowded not only with UK carriers such as Virgin Atlantic and British Airways, but also had no chance going head-to-head with the dominant local players in that market such American out of JFK (and more recently, Delta) or Continental out of Newark. In addition to having more local loyalty in the New York area due to the fact that they had more flights (which equals more convenience for business travelers as well as more options for frequent flyers to use their miles for leisure trips), both American and Continental gained by having stronger feeder networks for their London flights, whereas United was only getting feed from those other hubs such as San Francisco, Chicago, etc. The obvious problem was that those feeder markets already had their own nonstop flights to London. That meant that United's flights from JFK andNewark to Heathrow would only be filled by overflow out of those other hubs, or by local-originating traffic. Conversely, Continental and American serve dozens of cities from Newark and JFK respectively that don't have nonstop flights to London, and thus their feed was more natural and more diversified.
Continental also bring a strong online presence to Europe, whereas United had recently been cutting back much of its online European service in favor of codeshare agreements with partners such as Lufthansa. It had dropped Dulles-Milana few years ago (but recently replaced it with Dulles-Rome), and had also cut back on other service such as San Francisco-Paris. On the other hand, Continental had been constistently increasing its online European service in recent years. It did make some cuts recently such as Newark-Cologne, but most of its trans-Atlantic flights had been performing well, especially with eastbound European-originating traffic. Those Europeans, eager to take advantage of what for them has been a strong exchange rate in recent years, were eager for their own nonstop service to the New York area as well as the domestic connections via Newark that Continental was able to offer. This proved especially popular in smaller cities where locals could bypass connections in larger (and more chaotic) gateways such as Heathrow.
For example, Continental currently flies nonstop from 8 UK gateways to Newark; London Heathrow, London Gatwick, Manchester, Birmingham, Glasgow, Edinburgh, Belfast and Bristol. Yes, Bristol. London and Bristol are just about 120 miles apart, which means that there's no real need for flights between the two cities. That means that anyone from Bristol or southwestern England (or Wales) who needs to fly out of London is looking at about a 2 hour trip to the capital, plus traffic, plus the 3 hour international check-in window that's required at Heathrow these days for security reasons. Or they could just fly nonstop to Newark on Continental. In addition to Newark and other points in the USA, Continental has been able to tap in to its strong Latin American connections from Newark for European-originating traffic as well.
So if Continental was so strong then what do they stand to gain by any kind of alliance with United. In 4 letters or less: Asia. This has been United's strong point and one of Continental's weaker points, with the notable exception of Delhi and Mumbai. In addition to those two Indian cities (both expanding yet overcrowded markets in their own right), Continental only flies to 4 other Asian cities; Hong Kong, Beijing, Shanghai and Tokyo. United flies to 11 Asian cities; all of the above plus Osaka, Nagoya, Seoul, Taipei, Singapore, Bangkok and Saigon (Ho Chi Minh City). It's also slated to start nonstop service from San Francisco to Guangzhou in 2009, a route that's been delayed by a year due to the skyrocketing cost of fuel. Furthermore, most of United's flights to Asia depart from San Francisco or Los Angeles (with some out of Seattle, Chicago and Dulles as well), allowing for a more natural feed via the West Coast to Asia. Continental's limited service to Asia only operates out of Houston and Newark, limiting the natural westbound feed.
To a lesser extent Continental also picks up some other advantages such as United's flights to Australia (Sydney and Melbourne) which may explain why it decided to scrap its own unprofitable Guam-Cairns route. On the other side the Star Alliance, which amazingly consists of 20 main airlines and handful of smaller subsidiaries but yet has no Latin members following Varig's ejection in 2007 and Mexicana's withdrawal in 2004, picks up a strong Latin presence. (On a related note, Brazilian carrier TAM is rumored to be replacing Varig in the alliance sometime soon). Star Alliance also picks up a strong presence in New York, specifically Newark, which is especially valuable to the European member airlines such as TAP Portugal who stand to gain from Continental's strong feeder network there, something United can't provide.
Finally, I think in the end a lot of this did come down to what I mentioned earlier: the Delta-Northwest merger. Once that happened Contintental went from being the dominant US carrier in SkyTeam to an inevitably smaller player when compared with the new Delta. By joining Star Alliance it stands to gain by becoming a much larger player in a much larger alliance rather than being muscled out by a new larger player (Delta) in SkyTeam, a much smaller alliance.