The “productivity challenge” that we discuss in Chapter 1 comes to the forefront in the merger last October of two mega air carriers, United and Continental. Now the world’s largest airline (with more frequent flyer members than France has citizens), United Continental has turned to OM to lead the integration efforts. Shaving a half-cent off per-mile operating costs can boost profits by $260 million per quarter–something Wall Street was promised with the merger.
Businessweek (July 4-11, 2011) reports how “33 integration teams are making thousands of decisions, ranging from the fastest way to clean 1,260 airplanes and board passengers to which perks to offer in the frequent-flier program“. Most of the decisions are OM-related and team members come from technology, labor, fleet management, and network planning. In technology alone, the carriers have 1,400 separate systems, programs, and protocols. (Continental had 600 programs for tasks such as crew scheduling, dispatching planes, and managing cargo, while United had 800).
Economies of scale favor big airlines, but mismatches complicate every detail. Workers, for example, come from different labor unions with dissimilar work rules. United has 1st class cabins, while Continental has just business and coach. And history has not been kind. Pilots and flight attendants at US Airways (the merger of US Air and America West) are still operating under separate contracts with different pay, schedules, and work rules–6 years after their marriage! Delta has been bogged down in a labor dispute over pay and work rules since its merger with Northwest in 2008.
That’s why United Continental execs are so focused on the minutiae of the operations integration. “It’s not important how many things come from United and how many from Continental”, says the VP-Integration Management. “Keep the emotions out of it and don’t keep score”.
Discussion questions:
1. Why does OM drive a successful airline merger?
2. Why have other mergers run into problems?