Legislators are notoriously opposed to the airline industry’s current wave of consolidation, and that was clearly evident during a few weeks in June when Washington, suffering another of its blazing summers, was abuzz with fiery rhetoric and thundering diatribes against the proposed merger of two industry heavyweights. But as Continental Airlines’ Chief Executive Jeffery A. Smisek sat next to his compatriot from in the firing line of indignant lawmakers, he steadfastly refused to concede he was creating an anti-competitive behemoth, instead arguing that it would revitalize an industry “eking out an existence” while its international rivals increased market share.
Some lawmakers struggled with this concept, but importantly for Smisek his argument was accepted by the world’s regulators, and in just six months—an unprecedented speed in mergers of this magnitude—they approved a deal that cements the return of U.S. operators to the top ranks of global aviation.
Those hearings were but a small part of a busy year for Smisek, who, while grappling with his own merger, also facilitated SkyWest Airlines’ takeover of Continental’s main feeder airline, ExpressJet—a deal that established SkyWest as the world’s largest regional operator.
And the effect of the merger between Continental and United would quickly reverberate beyond the U.S. to Latin America, where executives atand TAM Airlines, worried that the resurgence of regional powers like themselves would be stifled by the consolidation of their northern competitors, formed their own merger plan to create the first Latin American operation to rank among the world’s powerhouses.
This was not the career 56-year-old Smisek envisioned when received his degree from Harvard Law School in 1982. Law appealed to the Air Force officer’s son, and by the mid ’90s he had risen to partner at Vinson & Elkins, where he specialized in corporate finance and securities law (and fortuitously for his future, mergers and acquisitions). But this changed in 1995 when Gordon Bethune convinced the lawyer that instead of trying to attract his business, he should switch careers and help pull a troubled Continental Airlines out of the doldrums.
“Back then it was clear he had a lot of spine,” says Bethune.
His first task as general counsel was to relieve Continental from the financial and operational burden of a fleet ofA300s. In an oft-told story, Smisek approached the carrier’s lessors with a proposal that not only returned the aircraft, but also helped place them with new customers. “There were two things needed in the situation; the first was to make the decision, and then it had to be implemented. Jeff was the right man and was given charge of the negotiations,” says Larry Kellner—an accountant also persuaded to join Bethune’s management team—who rose to lead Continental as chairman and CEO from 2004-09.
“In these cases, where typically you would send in the lawyers, we did send a lawyer, but one that understood the long-term business implications of these negotiations,” adds Kellner.
Both Bethune and Kellner note Smisek’s intelligence and quick wit, and laud his ability “to not worry about making the hard decisions” and his honesty in negotiations. But there is also another side to the man. “I wouldn’t want to be an adversary,” says Bethune. “If you punch him you had better watch out.”
These traits were clearly illustrated on the road to creating United Continental Holdings Inc.. For this, we need to go back several years, when Continental was being marginalized within thealliance, particularly by its domestic partners and Northwest Airlines, which were planning their own eventual merger in 2008.
Up to this point Continental had valued its independence, but the prospect of being the only U.S. airline without the financial and operational support of an alliance convinced management and the carrier’s board of directors that it should seek some form of partnership. And just as this conclusion was made, along came United Chief Executive Glenn Tilton, a vocal advocate of consolidation who had been seeking a merger to solve his own company’s fiscal woes.
The timing appeared serendipitous, and the two airlines conducted due diligence. But, as Kellner, by then Continental’s top executive, recalls, there were doubters. “I was happy to have Jeff’s counsel. We are not different in our goals, but we have different perspectives. Jeff was a leading voice in objecting to the merger.”
Smisek tells a similar story. “A merger with United was always the right thing for Continental, it is good for our future, and there is very little network overlap. But a merger is always risky. Simply executing one is difficult. But in 2008 the economy was going into a dive, capital markets had closed down, liquidity was strained. We were both losing money and the price of oil was surpassing $100. There was just too much headwind.
“Strategically it is the right deal, but then it was the right deal at the wrong time.”
As a result, Continental walked away from the merger contemplating a future as member of the Oneworld alliance, even though all the strategic models pointed to the, which was co-founded by United in 1999.
But Tilton had other ideas. Despite objections from his own senior managers and board members soured by their recent experience with Continental, he again approached Kellner and his team, this time with the promise of mentoring the Houston-based airline into its own alliance. Now there was no hesitation, and Continental duly accepted the offer and started the integration process that ended with its formal entry into the Star Alliance in October 2009. In hindsight, it also afforded the two companies a continuing due diligence that would make their eventual merger negotiations a formality.
But a merger was neither intended nor guaranteed.CEO Doug Parker, a fervent proponent of consolidation, was actively seeking a merger partner, and having failed in 2006 to persuade Delta to join forces, he had turned his attention to United. That deal, while not as operationally attractive as a Continental/United link-up, still provided a serious option for Tilton, and by early 2010 the two companies were nearing a definitive agreement. But then someone close to the secret talks leaked details to New York Times journalists.
This is where Smisek rose to the challenge. Time was limited and a major decision had to be made, one that meant the end of a brand he had helped resurrect and the loss of headquarters and operations in a different part of the country.
From a market perspective, Parker had the advantage. Continental had a history of faltering at such decisions, including a notable example in the late 1990s when Bethune ripped up an agreement with Delta, vowing never to hand power of his airline to another’s CEO.
According to people close to the United/US Airways negotiations, the Tempe, Ariz.-based airline “still had at least a 50/50 chance of being the only offer around.”
Smisek is matter of fact about those days in April. “If US Airways had succeeded, our only merger partner would have disappeared. There was no other option,” says the man who now sits at the head of the combined United Continental. This argument was pivotal to his congressional testimony. While under attack for perceived anti-competitive tactics, Smisek held that the opposite was true: that his airline had no real growth opportunity and that without this merger Continental would eventually disappear.
There were other elements playing in Smisek’s favor that made the decision easier. Notably, his actions were defensive rather than aggressive, which allowed him to persuade critics within his own board and across Houston’s business community that certain conditions—namely the lost brand and relocation—were necessary evils and that the alternative—going it alone—would eventually mean greater losses for all concerned. This freedom came with a small irony too, for Smisek had intended to approach Tilton about a possible merger in mid-2010, a move that surely would have enraged many close to the airline if Smisek had proposed the same deal he signed with Tilton.
Smisek was also granted a certain detachment. “If someone wanted to know: ‘Why Chicago? Why United? Why Tilton as chairman?’ All I had to say was, ‘Talk to Glenn,’” he recalls. “These were his conditions and the deal was over if they were not met.”
That is not to say Smisek capitulated. He agrees that a single headquarters had to be chosen and the flight operations facility had to be close to that base, and while Continental had superior brand recognition in the U.S., the United name was stronger in the international market that is fundamental to his expansion plans.
The economic environment had also improved since 2008. “The market was stable, capital was available at low interest rates, and profitability was improving. This time we had a tailwind,” says Smisek. It also helped that United had restructured its debilitating debt since the failed 2008 merger attempt and had shrunk from two and half times the size of Continental to just 20% larger than its Texas partner.
Regulators agreed, and approval was obtained in an unprecedented six months with only minor concessions. “I was happy, but not unsurprised by the speed of the [U.S. Justice Department’s] decision,” says Smisek. “The merger is a good merger. There is little network overlap, which means we keep most of our staff. And it is good for the industry as a whole.”
Smisek was also a factor, according to Tilton. “Jeff’s experience is beneficial in managing the complexity of realizing all of the benefits of the merger; such as capturing all of the synergies; leveraging the route network and improving customer service. Jeff is well aware of the considerable work that is needed to realize that potential and take United to a position of sustainable profitability and true global competitiveness,” says the former United chief and current chairman of United Continental.
While it is still too early to predict the full ramifications of this merger, the combination of United and Continental is a pivotal event in global aviation. Not only does it solidify the U.S.’s return to an industry-leading role, it emphasizes a prudence that was lacking from U.S. aviation. Mirroring Delta Air Lines’ merger with Northwest Airlines two years prior, the new United is committed to capacity control, and the creation of such heavyweights, while rankling consumer advocates, brings stability to an industry beset by years of bankruptcies and job losses.
For international carriers, it marks an end to a decade of weakened competition from North America as U.S. carriers struggled with unprecedented losses, low domestic demand and an uncompetitive product, and should enliven the battle for market share across the Pacific. It also brings new nuances to Continental Micronesia’s role as an intra-Asia carrier, and should embolden a transatlantic market that is at the forefront of consolidation.
And there was an almost immediate effect in Latin America, a region still developing but recognized by theas one of the most promising sectors for growth. Historically, U.S. carriers controlled most international access to Latin America, but while North American aviation focused on its recent troubles, several Latin American operators emerged to fill the void, notably Chile’s LAN Airlines and Brazil’s TAM Airlines, two carriers that have prospered in the past 10 years.
As recently as 2009, both LAN and TAM were content with organic growth, particularly the Brazilian operator, which constantly refuted merger rumors with potential suitors includingPortugal. But in August 2010, as it was becoming clear that the U.S. government would approve United’s deal with Continental, the two family-owned carriers unveiled their own merger, citing the growing trend of consolidation as a catalyst.
This new carrier, which will be called Latam Airlines, creates a regional power of unprecedented size that will rank among the likes of, and a merged / in terms of revenues and passengers carried.
United Continental’s formation also heightens the debate on international ownership laws, which many in the airline community say have restricted the industry’s growth since their enactment at the end of World War II. With United Continental joining Delta,- , Group and the newly announced International Airlines Group formed from the merger of British Airways and Iberia, regulators have shown an acceptance of regional consolidation; maybe now they will address restrictions on international ownership that no longer apply to most other industries.
Smisek also used the merger to facilitate SkyWest Airlines’ takeover of ExpressJet, anERJ operator created to provide most of Continental’s regional feed that has struggled to control costs since Continental sold its majority stake in 2002. In an enlightening Securities and Exchange Commission filing, ExpressJet details how the Continental chief executive brokered a supply contract with SkyWest even as the former Continental subsidiary was rejecting a takeover from its Utah-based rival. He then voiced his concern with ExpressJet’s management about the regional carrier’s economic viability, and his intent to walk away from his capacity purchase agreement with ExpressJet if SkyWest’s offer was not accepted.
Two months later, SkyWest was celebrating its own consolidation success, folding ExpressJet into its Atlantic Southeast Airlines operation, a division it acquired from Delta in 2005. This act gave SkyWest expanded access to the United Continental network, which relies heavily on regional operators to provide domestic feed into its hubs, and catapulted the company from an already strong position to market dominance. And while specific details of SkyWest’s contract with Smisek are unknown, it is widely assumed that the cost and performance conditions will become a template for every new regional contract across the U.S.
The ExpressJet situation also reflects the tenacious side of Smisek’s personality. “What happened was necessary,” he notes. “There were several problems, namely one single type of equipment with one single supplier that had an unsustainable cost structure. ExpressJet was not competitive, and that was not good for Continental. For one, we lease them the aircraft. We had to rely for feed on a contractor who could not price that feed competitively and survive.” Without his intervention, Smisek says, ExpressJet eventually would have collapsed and that would have reverberated across his own network. “It is very hard to wind down an operation and at the same time ramp up another. It is costly and time-consuming,” he explains.
Critics, however, hold that his involvement with ExpressJet illustrates a worrying trait. “Jeff is competitive, arrogant, smart, then back to arrogant and competitive,” says Jay Pierce, president of Continental’s Air Line Pilots Association (ALPA) chapter and a former ExpressJet pilot. “When Jeff has made a decision he doesn’t change. That worries me.”
According to the union chief, these same traits are evident in Smisek’s decision to assign 70-seat regional jets from United’s fleet into markets once covered by Continental’s scope clause, the country’s most restrictive in terms of aircraft seat capacity in feeder markets.
“We expected this to be discussed at the negotiating table, instead we hear about it from an analyst conference call,” says Pierce. “There are questions of integrity and thoughtfulness that come in to play. This is a stupid fight that could have been avoided.”
While there are solid arguments for the regional jet decision, it also stokes another criticism: that Smisek, despite 15 years in the industry, is a novice as CEO. “Jeff happened to find himself at the right place at the right time, but he is an unknown quantity to us. That is a concern,” says Greg Davidowitch, president of United’s Association of Flight Attendants chapter. Pierce, who has worked with Smisek for several years, meanwhile acknowledges that though he has experience “we must consider this is the first time he is up for this.”
Smisek’s cause is not helped by some unfortunate comments, including his classification of US Airways as the “ugly girl” suitor for United, and an apparent dismissal of labor’s involvement in the merger process often repeated by ALPA’s Pierce. He also angered several legislators during those contentious congressional hearings into the merger, when the fatal crash ofFlight 3407 near Buffalo, N.Y., in February 2009 was discussed, by appearing to distance his airline from the accident even though its was operating as a Continental Connection service.
And he failed to quash a simple criticism of the merger that focused on a doomsday scenario for the company’s 10 hubs, during a court hearing in San Francisco that indicated an annoyance with the entire merger process despite his many years as a mergers and acquisitions lawyer and airline executive.
But these hiccups, and Smisek’s failure to impress union leaders, so far, have failed to permeate through the ranks. He is more charismatic than most airline CEOs and has showed no issue with being approached by staff while he waits for a flight at Chicago O’Hare International Airport, be it an employee marking his 32nd year with United who just wanted to “meet the new boss” or a pilot wanting to talk shop. Now, this may merely be sociable, but in an industry that has seen one CEO openly carry a six-shooter through strike lines, another use private security to guard from death threats, and union websites calling for the instant dismissal of his own predecessor, Smisek’s ability to sit alone in O’Hare is noteworthy.
Labor dissent could still be a bigger challenge for Smisek than the financial merger, and union leaders have a legitimate concern; airline management has a poor history when it comes to labor negotiations. Here Smisek has some experience, as general counsel at Continental he drafted many union contracts, and there is a momentum at United that is reminiscent of his early days in Houston when employees were invigorated by a new management. But there are other issues that muddy the waters, particularly discord between the union groups fighting for supremacy at the new United, and here Smisek’s charm and tenacity will have to play second fiddle to patience, a trait that has not been needed since he assumed the top role at Continental at the start of 2010.
He appears ready. “Running a good airline is about service. If you enjoy coming to work every day, you will treat customers with dignity and respect. I am finding an enthusiasm here for what we are building, but we also need to build trust. There is a lot of work ahead, and there will be some anxiousness, but we are a family of 87,000 people intent on becoming the world’s leading airline, not just its largest.”
And Smisek is planning to encamp at the United building in Chicago for some time. “I am here to see this through,” he notes during an interview in his office on West Wacker Drive. And it seems this is not only about the merger. “This industry is fascinating. The competition is literally entering the market at 500 miles per hour. It has everything. You deal with capital markets, labor, it’s global, and you deal with the consumer.
“What more could you ask for?” he adds, even if his children wish he worked in a “more exciting” part of the aerospace industry they read about each week when he brings home his copy of Aviation Week.
President and CEO United Continental Holdings
Born: 1954 in Washington; raised in California, Germany and Texas.
Education: 1976, Princeton University, A.B. summa cum laude in economics 1982; Harvard Law School, J.D. magna cum laude
|Formed:||Oct. 1, 2010|
|Ticker:||UAL on the New York Stock Exchange|
|Single operating certificate:||Late 2011*|
|Aircraft:||548 narrowbody, 159 widebody and 547 regional aircraft (13 contract operators)|
|Destinations:||371 (223 in the U.S., 148 international)|
|Passengers (annual):||144 million|
|Capacity (2010):||253.3 billion available seat miles*|
|Traffic (2010):||211.6 billion revenue passenger miles*|
|Load factor (2010):||83.5%*|
|* estimates provided by company Source: United Continental Holdings|