Following the labor agreement with International Brotherhood of Teamsters, United Continental Holdings (UAL) has reached another milestone in integrating its workforce by ratifying a new labor agreement involving 15,000 United Airlines flight attendants represented by the Association of Flight Attendants (AFA).
According to the deal, United’s employees under AFA will receive a 10% compensation hike and a signing bonus of $5,000. Additionally, this new contract will expedite the process of negotiating a single contract covering flight attendants of both the airlines, United and Continental.
Although United and Continental merged in 2010 to form United Continental Holdings, employees belonging to the two carriers continue to represent two separate unions to date. In February last year, the company signed a contract with the flight attendants of Continental Airlines. The International Association of Machinists and Aerospace Workers, however, still represent Continental’s flight attendants and will continue to do so until a single contract is approved. We believe that the company’s effort to integrate its work force will have positive implications for its operational efficiency and also save costs for the combined entity.
Apart from integrating employee groups, the carrier is also contemplating combining passenger services of both the airlines. The integration process remains on track with United Continental Holdings receiving a single operating certificate from the Federal Aviation Administration (FAA) on November 30, 2011.The company expects to operate a single passenger service system by March this year through the consolidation of its information systems, fleet reallocations, carrier codes, flight schedules, inventory and departure control systems.
The merger is expected to generate net annual synergies of $1 billion to $1.2 billion by 2013, with $800 million to $900 million in additional revenue and $200 million to $300 million in cost savings. Approximately 25% of total synergies were realized last year. With the company’s sound cash position, industry-leading revenues and competitive cost structure, the merger provides improved access from Continental hubs to United’s strong Asia network and from United’s hubs to Continental’s international network in Latin America and Europe.
However, United and Continental are both highly unionized companies like its peer Southwest Airlines (LUV). As of December 31, 2011, United Continental had approximately 87,000 employees (United had approximately 47,000 employees and Continental approximately 40,000), of which approximately 72% were represented by various U.S. labor organizations. Thus, union disputes, employee strikes or slowdowns, and other labor related disruptions, along with the integration of United and Continental workforces in connection with the merger may delay expected merger synergies and increase labor costs or labor disputes, which in turn, would hurt the profitability of the company.
Currently, we maintain our long-term Neutral recommendation on United Continental Holdings. For the short term (1-3 months), the stock retains a Zacks #3 Rank (Hold).
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