Continental CEO Denounces “Distortion
September 3, 2010
- In April Continental and United Airlines negotiated a merger and on
May 3, 2010, United and Continental announced an agreement to merge the
two airlines. The new airline would retain the United name and
The merger would be financed exclusively through an all-stock transaction with a combined equity value of $8 billion split roughly with 55 percent ownership to United shareholders and 45 percent to Continental shareholders.
One of the primary financial benefits that airlines consider when merging with another airline is the cost reduction that may result from combining complementary assets, eliminating duplicative activities, and reducing capacity. A merger or acquisition could enable the combined airline to reduce or eliminate duplicative operating costs, such as duplicative service, labor, and operations costs—including inefficient (or redundant) hubs or routes—or to achieve operational efficiencies by integrating computer systems and similar airline fleets.
|Continental Airlines Chairman, President and CEO Jeff Smisek|
In June a consumer
group filed a lawsuit in
On Tuesday, in
court, a lawyer representing the consumer’s in their suite, Joseph
Alioto, questioned Smisek on an internal document “Hub Stats” which
indicated under a Continental United merger scenario
“I hope we will keep all our hubs open but I can’t guarantee that,” Smisek further stated under questioning from the lawyer for the airlines, Tim J. Coleman that the merger would result in the loss of 1,500 to 1,800 employees. This would include frontline employees such as airline attendants, reservation agents and pilots.
The media reported
Tuesday’s court hearing and as a result Continental Airlines Chairman,
President and CEO Jeff Smisek came out on Wednesday stating that the
media has “Distortion Of Facts.” Continental reported that it is
firmly committed to
Smisek joined the airline in March 1995 as senior vice president and general counsel. In December 2004, he became president and was elected to the company's board of directors. He became president and chief operating officer in September 2008 and assumed the role of chairman, president and chief executive officer in January 2010.
The reports were
based on one of many simulations analyzed before the merger was
announced, and modeled the most severe recession or disaster scenario.
The simulation was promoted by the plaintiffs’ attorney in the trial of
a lawsuit filed in
Since deregulation in 1978, the financial stability of the airline industry has become a considerable concern for the federal government owing, in part, to the level of financial assistance it has provided to the industry by assuming terminated pension plans and other forms of assistance. Between 1978 and 2008, there have been over 160 airline bankruptcies. While most of these bankruptcies affected small airlines that were eventually liquidated, 4 of the more recent bankruptcies (Delta, Northwest, United, and US Airways) are among the largest corporate bankruptcies ever, excluding financial services firms.
During these bankruptcies, United and US Airways terminated their pension plans and $9.7 billion in claims was shifted to the Pension Benefit Guarantee Corporation (PGBC). Furthermore, to respond to the shock to the industry from the September 11, 2001, terrorist attacks, the federal government provided airlines with $7.4 billion in direct assistance and authorized $1.6 billion (of $10 billion available) in loan guarantees to six airlines.
Although the airline industry has experienced
numerous mergers and bankruptcies since deregulation, growth of existing
airlines and the entry of new airlines have contributed to a steady
increase in capacity, as measured by available seat miles. Although one
airline may reduce capacity or leave the market, capacity returns
relatively quickly. Likewise, while past mergers and acquisitions have,
at least in part, sought to reduce capacity, any resulting declines in
industry capacity have been short-lived, as existing airlines have
expanded or new airlines have expanded. Capacity growth has slowed or
declined just before and during recessions, but not as a result of large
Most recently, U.S. airlines responded to volatile
fuel prices and then a weakening economy by cutting their capacity,
reducing their fleets and workforces, and instituting new fees, but even
with these actions, the airlines experienced over $5 billion in
operating losses in 2008 before posting an operating profit of about $1
billion in 2009. Furthermore, over the last decade, airfares have
generally declined (in real terms), owing largely to the increased
presence of low-cost airlines, such as Southwest Airlines, in more
markets and the shrinking dominance of a single airline in many markets.
|Other News Stories
|©AvStop Online Magazine Contact Us Return To News|