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United Continental Holdings Inc
US Airways Group Inc
Delta Air Lines Inc
Southwest Airlines Co
Last July, 14 months after United and Continental Airlines announced they were combining to form the largest carrier in the world, the merged airline took one of the thousands of steps required to integrate its fleet: It harmonized the coffee. Just as each carrier had its own logo, slogan, and peerage of frequent-flier status levels, each served its own blend of joe. Continental’s coffee was from a company called Fresh Brew, United’s was from Starbucks (SBUX).
“The new United,” as the merged airline called itself, had to choose. With one food-service supply chain, it made no sense to maintain two coffee contracts. And buying from one source offered the possibility of bigger volume discounts, exactly the sort of savings that United and Continental executives had hoped to create with the merger. The coffee question represented a tiny aspect of the problem of running an airline, but the quantities were huge: Last year the new United (UAL) sent enough coffee into the sky to brew 62 million cups.
The vice-president in charge of food services at United is a slim, chipper woman named Sandra Pineau-Boddison. She considers herself a coffee enthusiast “only if you count mochas as true coffee.” Still, Pineau-Boddison did not take United’s coffee decision lightly. For months the issue dominated the meetings of the beverage committee, a 14-member panel drawn from procurement, flight operations, finance, food services, and marketing. United’s head chef, a burly, bearded Irishman named Gerry McLoughlin, sat in. The committee solicited bids, then came up with 12 different blends to try. Members tasted them blind, and, in an affront to Pineau-Boddison’s sweet tooth, tasted them black.
By mid-2011 there was a front-runner: a lighter roast Fresh Brew blend called Journeys. It was cheaper than the old United’s Starbucks, and it did better in the taste tests. When colleagues outside the beverage committee were asked to weigh in, they concurred. The new United’s chief executive officer, Jeff Smisek, dropped by the food services floor for a cup and signed off on it. Journeys was served at a meeting of the company officers to general approval. Just to be sure, food services took the new blend on the road, to Washington Dulles, Chicago O’Hare, Denver, Los Angeles, and San Francisco, asking flight attendants to try it. Out of the 1,100 who did, all but eight approved. “We thought this was a home run,” says Pineau-Boddison.
On July 1 the new United introduced its new coffee. Fliers on the “legacy United” fleet, accustomed to Starbucks, let out a collective yowl of protest. Pineau-Boddison had expected some resistance—Starbucks, after all, is a popular brand—but this was something else. Flight attendants reported a barrage of complaints. Pineau-Boddison received angry e-mails from customers, as did Smisek. The coffee, fliers complained, was watery.
The beverage committee launched an inquiry. The coffee itself, they discovered, was only part of the problem. Airplane coffee is made from small, premeasured “pillow packs” that sit in a brew basket drawer at the top of the galley coffee machine. When the drawer is closed, boiling water flows through the pillow into the pot below. The old United brew baskets, the committee discovered, sit a quarter of an inch lower than Continental’s, leaving a space for water to leak around the pillow pack. That fugitive water was diluting the coffee—in fact, the old United had installed the deeper brew baskets for that very purpose, after passengers complained that their Starbucks was too strong. And so, by the end of the year, the beverage committee found itself back where it had started, trying out new pillow packs.
That’s coffee. Not a matter of life or death, or even on-time arrival. It’s not a question that requires federal regulatory approval or a union vote. Nor is it an issue that has anything to do with the core service of an airline, which is flying people from one place to another.
The past decade has seen a wave of consolidation among airlines: US Airways (LCC) and America West merged, so did Delta (DAL) and Northwest, Southwest (LUV) and AirTran, and Air France (AF) and KLM. In the past few weeks, US Airways and Delta have expressed interest in each other while independently eyeing American Airlines, now in Chapter 11.
All this amalgamating may be a good thing for the airlines. It could wring redundancies out of the system and, done right, bring order and discipline to an industry that since its deregulation in 1978 has been prone to destabilizing price wars and chronic overexpansion. (It’s also likely to raise fares, at least on some routes.) In buying Continental, United promised Wall Street $1.2 billion in new revenue and cost savings.
Still, combining airlines is tremendously difficult, largely because of the enormous number of things two airlines may do differently. At the new United, a few major decisions were made before the merger itself as preconditions imposed by one side or the other: naming Continental CEO Smisek the head of the new company, calling it United, and headquartering it in Chicago. The company has spent the time since then trying to work out everything else.
In conference rooms in the glossily renovated United Building in downtown Chicago and in United’s offices in the Willis (formerly Sears) Tower a few blocks away, Continental employees transplanted from Houston are working alongside their new United colleagues, spending months debating questions such as whether to board flights back to front, as most airlines do, or window, middle, then aisle, as legacy United did; whether miniature ponies will be allowed, as they were on Continental, to travel in the cabin as service animals (they will); whether Jet Skis are allowed as baggage (no); what information to print on the boarding pass; what direction dog crates should face when loaded into the cargo hold (backwards, as at legacy United, so spooked dogs don’t recoil and tip the crate off the conveyor belt); whether to require baggage handlers to wear steel-toed shoes (no official decision yet); what shape the plastic cups for cold beverages should be (wider than the old United cups but skinnier than the old Continental ones); whether unaccompanied minors should be identified by a bracelet or a button (bracelet); whether to have a first-class cabin like United or just business class like Continental (the former); and whether, in the first-class cabin, to serve nuts in a bag or heated in a ramekin (ramekin).
Like the coffee fiasco, even simple-seeming choices grow comically intricate when they involve commercial air travel, with its constant balancing of safety, cost, space, style, reliability, convenience, speed, and comfort. Last year, United had 33 teams working on integration, and in the fourth quarter alone spent $170 million on everything from technology training to severance to repainting airplanes.
“Merging two airlines is unlike merging any other businesses because it’s such a complex business, and we are so heavily regulated,” says Smisek, sitting surrounded by scale models of jetliners in his office in the United Building, with a view of the Chicago River and the office towers to the north. “There’s huge technology issues, fleet issues, facilities issues, people issues. It also takes several years, which I think is surprising to a lot of people.”
With United and Continental, the cultural complications are particularly sharp. Over the past decade and a half, Continental has built a reputation as a carrier that made its employees happy and catered to customers. At pre-merger United, relations between workers and management were openly hostile, poisoned by the battles of a recent bankruptcy. Among workers at the new airline there is hope, but also palpable impatience about the pace of the process. The company has yet to reach joint agreements with any of the unions representing the newly consolidated workforce.
The new United management, however, sees the merger as a rare opportunity. Despite recent signs of financial health among airlines, industry margins remain thin, squeezed by oil prices, a heavily unionized workforce, price-sensitive customers, and a supremely perishable product. (Once a plane leaves the gate, an unsold seat is never going to be sold.) Merging two large airlines into the world’s largest carrier buys some breathing room. It also provides a chance to step back, reexamine how things are done, and try to get them right.
If you want to blame someone when your United flight is canceled, blame Jim DeYoung. He oversees the consolidated network operations center, a NASA-style command room in Elk Grove Township on the outskirts of Chicago. Here, 170 staffers monitor information from the entire fleet, keeping track of speeds, altitudes, departure times, and scheduled and estimated arrival times. The network operations center determines when a plane should speed up, when it should slow down, when it should be rerouted. Day to day, the ops center is the airline’s brain. When I visited DeYoung in mid-January, it was snowing hard in Chicago, and he had just canceled 235 flights in and out of O’Hare.
For the past year and a half, DeYoung has had a second job, which is to merge Continental’s operations center in Houston with United’s in Elk Grove. “We decided that we were going to treat this, at least in my division, in a similar manner as an O’Hare snowstorm,” he says. “It’s a daunting task to integrate these while the airline’s moving, and we can’t just stop the airline.”
Among the questions that preoccupy DeYoung and the ops center’s integration teams is the speedup-slowdown calculation. Every airline has a different algorithm to determine when a plane will go faster to make up for a late departure, and when, to the disappointment of its passengers, it will not. Flying faster burns more fuel, and fuel costs money; United burned 3.3 billion gallons of jet fuel last year at a cost of about $25,000 a minute. But being late costs money, too: Customers who miss connections have to be rebooked and sometimes put up in hotels; flight crews have to be paid for the extra time; and ground crews sit idle while they’re on the clock. The speedup-slowdown algorithm crunches all of those factors and tells the ops center when the cost of being late outweighs the cost of speed. While DeYoung won’t get into specifics—he says these are trade secrets—United’s and Continental’s algorithms didn’t always agree. One of the ops center’s integration teams is working on a system that marries elements of both.
The team’s biggest headache in the merger, however, has been combining flight information systems. Along with labor negotiations, information technology tends to be the thorniest part of an airline merger. Integrating IT dogged the 2005 America West-US Airways consolidation: When the new airline combined its reservation-and-ticketing programs in March 2007, the new system couldn’t communicate with airport kiosks, and snarls at ticket counters led to days of missed flights, delays, and angry customers. Flight information systems—as opposed to passenger information systems—present a different, more frightening, challenge. If data were to be corrupted in the switchover from two flight information systems to one, the airline could find itself without vital information about its flights—their destination or arrival times, their flight numbers, or locations. It would be like the lights going out in the middle of a juggling act.
DeYoung takes an almost ghoulish pleasure in describing the stakes. “You’re nodding your head,” he tells me, “and I’m thinking I’m not imparting just how bad this could have gone.” His eyes widen: “There’s just so much information.”
Last August the ops center’s functional integration team (its “FIT team”; each department at the new company had one) decided that legacy United’s flight information system, Unimatic, would be better able to handle the size of the merged airline’s fleet than Continental’s. At that, a second team, made up of computer technicians and ops center managers, began drawing up an exhaustive list of tests and contingency plans to ensure that the data could be combined without causing a catastrophe. DeYoung insisted that the airline’s emergency operations center be fully staffed for the data cutover—a measure legacy United had last taken in April 2010, when the Icelandic volcano Eyjafjallajökull grounded European flights for weeks.
For their final test in late October, the transition team had an empty Continental 737 fly from Houston to El Paso and back just to make sure the ops center could track it. The team had the pilots pretend to have a mechanical problem and return to the gate. That showed up in the system. Then it had the pilots change the flight number and reroute the plane to Austin to see if that showed up. It did. Encouraged by the dress rehearsal, DeYoung set a date for the transition.
On Nov. 2, just after midnight, a time when there would be relatively few flights in the air, technicians took Unimatic offline. With a couple of mouse clicks, they started flowing Continental’s data into it. For the next hour, as the technicians updated and tested the software, the Elk Grove ops center tracked United’s flights manually. That would become impossible when air traffic rose to daytime levels, and DeYoung had laid plans for a mass cancellation the next morning in case the system wasn’t up and running. At 1:23 a.m. Central Time, the entire ops center was on its feet, everyone’s eyes on the aircraft tracking screens as Unimatic went back online. There were a few small glitches—planes that had crossed the international dateline during the outage had an extra 24 hours added to their arrival time—but otherwise everything worked. Elk Grove broke into applause.
Integrating the flight information system was vital for the merger to clear its biggest regulatory hurdle: getting a single operating certificate from the Federal Aviation Administration. By the time the certificate was awarded on Nov. 30, more than 500 employees had worked on the process, paring 440 manuals—governing everything that takes place before, during, and after a flight—down to 260.
Among those protocols was the wing walker question: Continental had required two baggage handlers to walk beneath an airplane’s wings to help guide it into the gate upon arrival. Legacy United went without wing walkers, preferring to have the handlers already at the wheels of baggage tractors. As part of the single operating certificate process, a team of airport operations people had to resolve the discrepancy. Looking into it, they found that wing walkers don’t actually make planes less likely to run into things and that having workers poised to unload bags shaved 90 seconds off the process. And yet the new United went with wing walkers—it heightened the perception of safety, the airport operations team decided, and that was enough.
The last major piece of IT is the passenger information system, which is still split between two databases. As Smisek sees it, that means he’s still running two separate airlines as far as customers are concerned. “If I’ve got a United ticket and I go to what I believe to be a United agent and it happens to be a Continental agent, the poor Continental agent can’t even see me on the computer,” he says. “Or I take a Continental plane and park it at a United gate, the agent can’t handle the passengers, either coming off the airplane or coming onto the airplane. We have two different websites with two different loyalty programs.” Swipe your card at a United kiosk, and you have to wait while the machine pings both systems to find you.
Sometime in the first week of March—it’s a sign of the company’s apprehension about the move that it declines to be specific—that will change. Throughout the new United, everyone is talking about a single passenger service system—PSS, they call it—in somewhat apocalyptic tones, the way IT consultants once invoked Y2K.
As with the flight system, there are technical issues—the company isn’t eager to repeat US Airways’ debacle—but there’s also a human factor. The new United is adopting Continental’s passenger services system, a Hewlett-Packard (HPQ) program called Shares. According to Martin Hand, United’s senior vice-president for customer experience, the program is more flexible than legacy United’s program, Apollo. Shares is easier, among other things, to customize so it can ask travelers whether they’d like to purchase an upgrade or extra legroom. But Shares is also less intuitive than Apollo, and United veterans are struggling to learn it. According to Smisek, all the dry runs have gone well; just after New Year’s Day, legacy United agents handled all the Continental flights at LAX.
Still, there’s some trepidation among the agents. “It’s a little challenging at the moment. We just get this on-the-job training a couple hours here and there,” says Traci Pierce, a customer service agent at O’Hare who was with the old United for 20 years before the merger. “I’m not nervous or scared yet, but probably, the day of, I’ll be like, ‘Oh God, I hope I can do this.’ ”
Once the airline solves that puzzle, it will face an even more complicated one: The demands of the people who work for it. The merger-related issue that will dominate the next year at United is negotiations with the unions—in particular over how to reconcile the two seniority scales that determine who gets to fly where and work when and how much everyone gets paid. And the uniforms. By the end of the year, United has promised new ones. The topic comes up often in conversations with employees. There are safety issues, like the steel-toed shoes, and some workers are impatient because they’re putting off replacing their old uniforms. Many, however, have strictly sartorial concerns.
Warren S. Moore is an O’Hare customer service agent who came from the Continental side—a tall, amiable man with a slow stride who spends much of his time these days training his new colleagues on Shares. He’s been happy with the merger; it’s given him a lot of new people to get to know. But he does worry about the new uniforms. “I like the fact that Continental has three different types of shirts and a few different types of ties that you can wear as part of your uniform, where United only has the one,” he says. “Because that gives me a different appearance every day, and that’s important to me. Whereas the young ladies get to wear sweaters and jackets; they have quite a bit of apparel to distinguish their uniform.”
Everyone at United is hoping this is the year the labor situation gets sorted out, but hopes in the airline business can be long deferred. Six and a half years after its merger with America West, US Airways still hasn’t gotten unified contracts for pilots, and it announced a tentative pact with flight attendants only late last month. Delta, whose 2008 merger with Northwest is seen by many in the industry as exemplary, is only now beginning to merge much of its workforce after the National Mediation Board late last year rejected complaints from three unions that the airline interfered in their elections.
At the new United, management and labor have their own explanations for the delay: Airline negotiators say they had to wait for the unions to have elections and sort out their internal differences. Some of the unions, however, say the carrier has repeatedly dawdled in responding to demands and offers. “The emphasis has been on paint jobs and Presidents Clubs and not on the operational side,” says Jay Pierce, head of the Continental pilots’ union. Still, as he puts it, “I am bullish on 2012. I think we’ll tie up all the contractual issues.”
Considering how much attention the labor pacts have gotten, it’s a surprise to find out that there’s near-universal agreement—among management, labor, and industry analysts—that the airline doesn’t really need the pacts to capture most of the gains of the merger. Other than mixing and matching flight crews, there’s little that the lack of joint accords prevents them from doing. “Let’s take the worst example ever, which is America West and US Air,” says Robert McAdoo, a former airline executive and now an analyst at Avondale Partners. “They still haven’t gotten their labor seniority thing put together, and they just had their best fourth quarter ever.”
For the company, however, the point of getting the contracts merged is as much a social issue as a financial one. Before the new United can feel like one entity to consumers, it has to feel like one entity to its employees. Ultimately, that’s the most difficult part of a merger—combining cultures. And with United and Continental, there’s work to do. Once the nation’s preeminent domestic carrier, United had still not fully recovered from its 2002 bankruptcy when it merged with Continental: Layoffs and salary and spending cuts had caused a sharp rise in customer service complaints and poisoned relations between unions and management. The low point may have been in 2008, when United pilots caused hundreds of flight cancellations by calling in sick in record numbers during the peak summer travel season. Then-CEO Glenn Tilton accused the union of conducting a “sick-out” to protest layoffs, and the company won a restraining order against the union in federal court.
Continental has been a far happier place. Like every other airline, it’s had to contend with Sept. 11, high fuel prices, and the 2008 recession. It has managed, however, to retain the gung-ho culture that still-beloved former CEO Gordon Bethune brought to the airline in the mid-1990s. During Bethune’s tenure and after he stepped down in 2004, Continental regularly topped industry customer satisfaction surveys and was a stalwart on Fortune’s list of the country’s 100 best employers.
Traci Pierce, the United gate agent, is optimistic. Over her two decades at United, she watched customer service and worker autonomy decline in tandem. When she first started, gate agents were able to hold flights for connecting passengers at their discretion. Gradually, the airline took that away, moving to a rigid cutoff. At the new United, she says, “We have the authority to say, we’re going to hold for these people because we’re still going to make it on time to our destination.” The airline is also getting back to having two agents per gate where legacy United, in many cases, had scaled down to one. “I want to see it get back to the way it used to be where I was proud to work for United, not embarrassed,” she says.
On Mar. 1, United will launch its new new coffee. Again, it’s a Fresh Brew blend, Kova, but a medium roast rather than a light roast. And it will come in a slightly larger pillow pack—2.5 ounces rather than 2.25—to ensure a stronger brew. Pineau-Boddison considered replacing the old United brew baskets, but she thinks the new coffee will be a faster fix. Asked whether this just means coffee drinkers on legacy Continental planes will be complaining that their coffee is too strong, she points out that this time the airline tested the coffee inflight, in legacy United and Continental planes. The response has been good. Still, she is holding her breath. “I got an e-mail from someone recently that said, ‘It’s not rocket science,’” she says, “and I thought, no, it’s a little bit of rocket science.”