Companies & Industries

Making United and Continental Fly in Formation


On June 29, United Continental Holdings (UAL) executive Lori Gobillot’s calendar was jammed with 27 meetings and phone calls, some scheduled simultaneously. That’s pretty typical these days as she oversees almost three dozen teams of managers who—one decision at a time—are stitching together United and Continental to form the world’s largest airline. In technology alone, the carriers, which merged last October, have 1,400 separate systems, programs, and protocols. Workers from the two predecessor airlines are represented by different labor unions and subject to dissimilar work rules. Even the airplanes are mismatched. United’s fleet has first-class cabins; Continental’s planes have just business and coach. United Continental has told Wall Street that it can find $1.2 billion in new revenue and cost savings from the marriage within three years. That can only come from rationalizing operations and removing redundancies—and fast. So the pressure is on Gobillot, vice-president of integration management. “It’s such a complex, stressful, difficult experience,” she says. “But once you’re finished, you have exactly the house you want.”

The resulting megacarrier will ferry passengers between 373 airports in 63 countries, with major connecting hubs in New York, Chicago, Houston, San Francisco, Washington, Los Angeles, and Tokyo. United Continental is betting that its huge list of destinations—and a frequent-flier program that has more members than France has citizens—will lure high-paying business travelers from Delta Air Lines (DAL) and American Airlines (AMR). The carrier’s sheer heft also suits an industry where economies of scale favor the big. Simply shaving a half-cent off United Continental’s per-mile operating costs would have boosted first quarter operating results by about $260 million.

Still, plenty of past airline mergers have hit turbulence that cut into hoped-for savings. Pilots and flight attendants at US Airways Group (LCC), a combination of US Airways and America West, are still operating under separate contracts with different pay rates, schedules, and work rules—almost six years after the merger. And Delta Air Lines remains bogged down in a labor dispute that’s kept it from equalizing pay and work rules for flight attendants and ramp workers at Delta and Northwest Airlines, which it bought in 2008. That’s why United Continental execs are so focused on the minutiae of the integration. “The guiding principle is: This is our once-in-a-lifetime opportunity. Let’s not blow it,” says Chief Executive Officer Jeffery Smisek.

Smisek is counting on Gobillot, an old colleague from their days at Houston’s Vinson & Elkins law firm, to make it happen. The executive, who turns 50 this month, worked at Continental for a dozen years as assistant general counsel on projects including a venture with online travel agencies Orbitz (OWN) and Hotwire, and a partnership with Panama’s Copa Airlines (CPA). Although this is her first operational job, Gobillot was an obvious choice, having coordinated the carrier’s due diligence with United during failed 2008 merger talks and again leading up to the 2010 deal. She had the foresight to archive the “electronic data room” that allowed the carriers to swap financial information in 2008, which sped the 2010 talks by avoiding a standing start. Gobillot’s 33 interdisciplinary integration teams are making thousands of decisions, ranging from the fastest way to clean 1,260 airplanes and board passengers (should the arms on seats be up or down?) to which perks to offer in the frequent-flier program.

Immediately after the merger was finalized, Gobillot began holding 20-minute powwows with each of the teams, which include personnel from both airlines. Members include managers from technology, labor, fleet management, network planning, and other departments, and are structured around operations, commercial activities such as a credit-card partnership with JPMorgan Chase, and finance. “It was kind of like speed dating,” says Gobillot. The groups quickly agreed to keep first-class seats on United’s international planes because they bring higher fares and are a competitive advantage over rivals such as Delta and Australia’s Qantas Airways, which don’t have them. A last-minute first-class roundtrip from Washington to London is $16,519, double the price of a business-class ticket and 10 times more than a coach fare. The downside is that Continental’s jets don’t have first-class seats, which may confuse some customers and make it difficult to shift equipment around the system.

Gobillot’s groups also persuaded Smisek to keep United’s Economy Plus seats, which offer extra legroom for between $9 and $109 each way. It’s a feature Smisek says he was “suspicious” of until he saw data on how profitable it is. The seats can add thousands of dollars per flight and provide a marketing edge. Now Gobillot’s teams are tackling more complex issues, such as those 1,400 technology systems. (Continental had 600 programs for tasks such as crew scheduling, dispatching planes, managing cargo, and bookkeeping, while United had 800.) So far, they’ve chosen to keep Continental’s passenger services system, while retaining United’s Oracle general ledger software and PeopleSoft payroll programs. In almost every case they are adopting a program one of the carriers already used so at least some employees will be familiar with it. Gobillot soothes hurt feelings by reminding everyone that it’s not an us-vs.-them situation. “I tell them to be fact-based, and direct and objective, and keep the emotions out of it—and don’t keep score,” she says. “It’s not important how many things come from United and how many from Continental.”

Gobillot, who gets by on less than six hours of sleep a night, maintains color-coded to-do lists, is tethered to her BlackBerry, and Skype-calls her three school-aged children while traveling between meetings. (She recently gave a thumbs-up to a new dress her daughter bought by glimpsing it over the video-phone service.) If a team hits a roadblock, she postpones the next meeting for a week and invites more senior managers to join the deliberations. She moves on to another task while waiting. “I set a tight deadline. That is the way we’ve been able to execute on this,” she says.

The bottom line: Managers at United Continental, with $37 billion in revenue and a fleet of 1,269 planes, are rushing to identify savings from the marriage.

Credeur is a reporter for Bloomberg News.

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Companies Mentioned

  • UAL
    (United Continental Holdings Inc)
    • $50.41 USD
    • -0.62
    • -1.23%
  • DAL
    (Delta Air Lines Inc)
    • $39.69 USD
    • 0.13
    • 0.33%
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