United Continental Holdings (NYSE:UAL), created in 2010 after the merger of United Airlines and Continental Airlines, has been granted a single operating certificate that covers both carriers. The move by the Federal Aviation Administration (FAA) marks the culmination of 18 months of alignment work between United and Continental, who have integrated hundreds of internal policies and procedures in pursuit of becoming a single entity.
Though questions remain over joint pilot training, the FAA’s designation will be seen as a significant milestone on the path to boosting operational efficiency, and it reinforces the Trefis long-term stock price target of $26.
2,000 Operating Procedures Already Refined
To the average passenger, the formality of a single operating certificate will most likely go unnoticed. Air traffic controllers will now refer to both carriers’ planes as ‘United’, but beyond that little will appear to change until Q1 2012 – when the two airlines’ websites will be combined under a re-branded United name. Behind the scenes, however, the regulator’s move brings to an end 18 months of collaborative decision-making over operational norms.
The Los Angeles Times reports that about 2,000 individual policies have been amalgamated, with everything from passenger boarding methods to staff standby privileges being up for review.  Though cockpit training procedures and maintenance manuals have yet to be finalized – due in large part to an unsuccessful lawsuit by United pilots – it is expected that standardization will deliver significant operational savings in the medium-term.
United and Continental had previously reined in non-fuel operating expenses after the recession, down from 63.7% of revenue in 2006 to 55.9% in 2010. However, we forecast that work associated with the merger will push the figure up to 57.4% this year. Though higher costs will continue rising in the short-term, we see the metric leveling off at around 60% by 2013. With fuel costs also expected to flat-line, this contributes to Trefis price estimate of $26.
Fleet Homogenization to Deliver 30% More Upside?
Looking beyond the economies of scale and operational synergies derived from creating the world’s largest airline, United Continental has another significant opportunity to cut costs. The holding company currently operates a mixed fleet of around 700 planes, comprising more than a dozen aircraft models of which roughly 75% are Boeing and 25% Airbus.
Negotiations are underway with both manufacturers for 180 new narrowbody jets,  but flying multiple aircraft types is known to be a drag on efficiency. If Boeing wins exclusivity on the deal – particularly through a single order for its 737MAX model – then United Continental will enjoy savings on streamlined scheduling, controlling and MRO (maintenance repair and operations). Move the trend-line above to see how trimming just one percentage point from the Trefis operating expenses forecast by 2018 translates to an extra 30% upside on the Trefis valuation.Notes:
- United and Continental airlines working out details of merger, Los Angeles Times, Dec 2 2011 [↩]
- Jetmakers battle for United order, Reuters, Nov 23 2011 [↩]