Source: The Wall Street Journal
Author: Susan Carey
With the flip of a switch on March 3, the world's largest airline, United Continental Holdings, took its biggest step toward fusing the operations of two of the nation's largest carriers: It merged the United and Continental reservations systems, websites and frequent-flier programs.
The results were not pretty.
Lawrence Fung, a retired investor from Honolulu and United customer for 45 years, says he spent hours on the phone trying to postpone and rebook a trip to Hong Kong and to purchase a seat upgrade. His frequent-flier number had changed and he needed a new password.
"I'm very loyal to United," he says. "But unless they go back to normal, it's hard to even buy a ticket." Fung says many of his frequent-flier friends are "fed up" and want to spend all their United miles and switch to other carriers. He says he plans to fly Delta to Istanbul in July.
Nearly 20 months after completing their $3.2 billion merger, United and Continental are grappling with the messy business of stitching together two sprawling operations. The process has left many longtime customers fuming, bewildered many of the company's agents and slowed revenue growth.
The company can ill afford to alienate its elite frequent fliers, a notoriously finicky bunch who make up about one percent of frequent-flier membership but account for about 25 percent of airline revenues.
Many of them are business travelers who fly constantly and pay top dollar for their tickets. They have rigid routines and little patience for disruptions. Some have a propensity to vent on internet message boards when annoyed.
They bombarded United with complaints after the March switch-over, a torrent that has not entirely subsided even though the company says it has fixed many of the problems.
On a conference call with investors late last month, United CEO Jeff Smisek apologized for not delivering satisfactory customer service. The transition "was a monumental task for our company," he said, one that will result in new routes and in-flight services that passengers want.
He said the company was on the "steep back slope of our integration," meaning the problems will diminish and the customer benefits will increase.
A decade of airline consolidation has proved the business logic of such unions, with the industry broadly profitable once again. Another such deal may be on the way. US Airways Group Inc. is pursuing a merger with American Airlines parent AMR Corp., which hopes to remain independent when it exits bankruptcy protection. But in many cases, mergers have brought temporary lapses in day-to-day operational performance—and spurred other airlines to try to lure away the most active frequent fliers.
When the United-Continental deal was announced on May 3, 2010, it was heralded as a shrewd move. United is strong across the Pacific and in the Western U.S., while Continental has a massive hub in Newark, N.J., to serve the New York market, and extensive routes to Latin America. United hopes the larger route map will allow it to lure more elite business travelers. It has projected that the combined operations will generate up to $900 million in additional annual revenue by 2013.
Stitching together two big carriers takes years and involves decisions about everything from pilot training and labor contracts to rules for transporting unaccompanied children and the design of the paper napkins used in coach. Other big airlines have struggled to get their mergers aloft. After Delta Air Lines Inc. merged its computer systems with those of Northwest Airlines in early 2010, its on-time performance temporarily deteriorated and flight cancellations grew. Southwest Airlines Co. is struggling to absorb AirTran Airways and has pushed back its integration timetable.
Airline computer systems are the brains of their operations, handling reservations, seat assignments, boarding, luggage tracking and frequent-flier program awards.
"Any change has to be consistent across all applications" because they all affect the passenger's experience, says partner Ted Rouse of consultants Bain & Co., which advised both United and Delta in their merger processes. Because integration typically occurs in stages over several years, he says, it puts "customers and employees through multiple pain points.
Delta, which acquired Northwest in 2008, integrated its various computer systems in stages, a process that went relatively smoothly. United elected to tackle a bunch of integration tasks all at once: United would begin using Continental's reservations system; Continental's OnePass frequent-flier program, with about 40 million members, would be merged into United's MileagePlus plan, with about 60 million, and various program policies would change; and there would be a single website and customer-service telephone help desk. It all happened on March 3.
"We chose to do open-heart surgery once instead of five times," United's chief executive, Mr. Smisek, said in an April speech. The idea was to minimize customer hassles.
Despite extensive training, United agents struggled with the Continental system, causing transaction times at airports and reservation centers to jump. United's discontinued system, for example, had made it easier to check in several people holding different reservations at the same time, says one 24-year veteran of United.
Rich Delaney, president of the International Association of Machinists district that represents the United agents, says the agents "can't get the system to do what they need to handle customers, especially at the high end." He says he expects the problems to resolve themselves, but says the company "took on way too much on one day."
United says it is planning changes to the system late this year that will make it easier for United agents to use it.
Frequent fliers began encountering problems as soon as the reservations systems were merged. The mileage accounts of some passengers were improperly recorded. Complimentary seat upgrades weren't transmitted before elite customers traveled. Some seat assignments for United's roomier Economy Plus coach seats—a popular perk for elite fliers—didn't go through. The wait times to get a live person on the phone soared. Adding to the confusion were thousands of frequent fliers calling agents to try to work out the nuances of the new mileage plan.
Susie Kamb, a personnel manager for a large media company and a gold-level frequent flier on United—the third tier down of elites in the pecking order—canceled a trip in March for which she had used reward miles. She called and arranged to pay the fee to redeposit the miles in her account—a process that she says normally takes just minutes. After two weeks, the miles still weren't in her account. When she called again, she says, she spent an hour in "a vast wasteland of hold" before she got her problem resolved.
"I was a big United person," she says. "But these days, the first airline website I check is American. They're a lot more customer friendly."
United acknowledges that wait times to reach airline representatives initially soared, but says that most of those problems have been ironed out. The company says callers now get through to agents in about 4½ minutes, on average, and that it is informing customers on its website about steps they can take to solve problems.
But frequent fliers continue to fume about other things, especially the effect of so many more elite frequent fliers—the result of two programs being merged—competing for seat upgrades and other perks.
Rebecca Rolfes, a publishing executive in Savannah, Ga., says the larger pool of elite fliers who rank higher than her gold level has made it harder for her to get an upgrade to first class. "When I get an upgrade, which is extremely rare, it is always on a [short] flight where there are no extras in first class," she says.
A United spokesman says the enlarged route network allows more elite fliers to land upgrades, but on some heavy business routes from hubs it may be tougher.
Jeff Nay, president of a Tysons Corner, Va., sales-training business who was an elite Continental flier, has had similar problems. On a recent trip to Florida, he says, he was fourth in line for four available seats up front. "Suddenly, there were 12 people ahead of me on the upgrade list," he says. "If I can't upgrade, the airline really doesn't have any value for me."
He says he does see one "really big positive": With United in the picture, "you can go more places. That's a great thing."
United took away several perks from those at the lowest level of its elite-flier pecking order—the silver level. They can no longer check two bags free, only one, and they can't upgrade without charge to roomier Economy Plus seats until 24 hours before departure—at which point United often has sold the seats to other passengers or higher-ranked elite fliers have snapped them up free.
United Chief Financial Officer John Rainey told investors last week that "we had certain groups in this program that were over-entitled, if you will." With the reduction of benefits to lower-tier elite fliers, he said, "we've realigned the benefits…with what the program participants are actually providing to the airline."
Rule changes have irked even some of the highest-ranked frequent fliers.
Jim Wallis, who runs international sales for a Reading, Pa., plastics manufacturer, is in United's top tier, thanks to his 150,000 miles a year on the airline. Since March 3, he says, he has had several frustrating encounters with agents over travel problems. Moreover, United used to allow fliers like Mr. Wallis with more than two million total miles free access to its United Club airport lounges. After enjoying the privilege for years, he now is required to buy an annual pass for $375. On the other hand, United says, the rule change conferred elite-status-for-life on a spouse or companion, a new perk.
"They're really working hard at losing me as a customer," Mr. Wallis says. "If Delta came to me and said, 'You'd have the same perks on Delta,' I'd jump over right away."
Airlines routinely try to capitalize on their rivals' troubles to poach their most valuable frequent fliers. Some elite United fliers have called American asking to switch into the AAdvantage loyalty program at their same elite status, which American agreed to do. When that came to light in late April on a frequent-flier Web forum, AAdvantage members complained that their perks would be diluted. American said it told its members their interests are uppermost.
Delta has succeeded in signing up top-level elite customers from both United and American, according to one person familiar with Delta's effort.
United said such poaching isn't unusual, and that it is seeing a "huge bump" in its enrollment of American elites since that airline filed for bankruptcy-court protection in November.
So far, the revenue boost United hopes to gain from the merger hasn't materialized. That is partly because United sold fewer seats than it could have in March because it didn't want packed planes to contribute to the chaos if the computer transition didn't go well. In addition, a separate merger of computer systems—in December Continental began using United's system for managing ticket pricing—unexpectedly reduced bookings by passengers making flight connections. That problem was corrected in March, but the revenue hangover continued into April, the company said.
United's unit revenue—the amount taken in for each passenger flown one mile—rose just 5.2% in the first quarter, compared with an increase of 14% at Delta and 8% at US Airways. United's quarterly loss more than doubled to $448 million, from $213 million a year earlier, in part due to an increase in one-time integration expenses.
Critical measures of operational performance have been disappointing. In March, United ranked 13th of the 15 major carriers in domestic on-time arrivals. It hasn't ranked in the top three since the first quarter of 2011, when Continental's performance wasn't included. The combined United was the fourth-worst of the 15 airlines in March for mishandled luggage complaints per 1,000 passengers.
Mr. Smisek said in April there was a "silver lining" of the troubled system conversion: United discovered "deficiencies" in how it had dealt with customer service before the switch, and that fixing them will improve service.
United still has a lot more merger work to do, including switching United to Continental's information-technology system for maintenance and training mechanics to work on both United and Continental planes.
United is analyzing its airport-staffing levels because its two units have different standards for waiting times at airport check-in counters and for the ratio of agents to passengers, and agents to self-service kiosks, among other things.
Labor tensions continue to simmer, particularly among pilots. Before United can mix and match aircraft and crews—one way to unlock merger efficiencies—its employees need joint labor contracts and seniority lists. While all the employees now have agreed on which union will represent them, there are no joint contracts and many workers are getting tired of waiting for raises and enhancements.
Mr. Rainey, United's CFO, told investors that, problems aside, the complicated merger was still on track to deliver the kind of revenue gains envisioned when the deal was struck. "It was a huge effort for us," he said. "It was the single largest technology migration in the history of aviation."