Taking Stock: United Continental

Dear Mr. Berko:

What are your thoughts on buying shares of the new airline called United Continental? I’ve lost money on both in the past, but perhaps this is a good time to buy the merged airline. I’d invest $7,500 to buy 300 shares. I also have frequent flyer points on both lines. What will happen to them?
C.R., Phoenix 

Dear C.R.:
Way back in the late 1980s through 2006, I was a traveling fool, giving four to six speeches per month, traveling from Santa Barbara to Syracuse and from Boca Raton to Boston to Baton Rouge. I spoke at fundraisers, graduations, investor conferences, lecture series and good old-fashioned open forums sponsored by newspapers and civic groups. And I loved every minute of it, except the flying. 

I discovered that the airline employees seemed to compete with employees at other airlines to find new ways to humiliate passengers. As a result, I have a hard spot in my heart for every airline except for Southwest (LUV-$13), inarguably the best-managed airline in our quadrant of the galaxy. Now, my perspective may be clouded, but I will bend overboard to be fair.

I would not buy the new shares of the United Continental Holdings (UAL-$28.16). I don’t want to cast asparagus on this new company, but any 10th-grade gene splicer will tell you that when you combine one bad gene with a second bad gene, you’ll get one really big, bad gene. Well, this merger has created the world’s biggest airline, and there’s a 60-40 chance it may become the world’s largest worst airline.

Here’s my take: The big-shots, the medium big-shots and the wannabe big-shots at Continental and United have management styles that are as different as cheese and chalk. The lines will operate independently for six to 12 months while the territorial Alpha males at both carriers will be competing fiercely to keep their jobs. They know that many of them have to go. So the crutch of the matter is: Can these Neanderthals climb out of their protective corporate shells and merge their disparate corporate cultures in a way that benefits the traveler, the communities they serve and the new shareholders?

Together, Continental and United have 88,000 employees, and about 22,000 unlucky folks will get “bumped.”

Meanwhile, UAL’s very high debt-to-capital ratio means the new company must rely inordinately on borrowed money to run operations. And it’s reasonable to believe that future borrowing costs will make it difficult for the new UAL to fund future expansion. 

I’m also concerned that price competition from low-cost carriers and legacy peers will force the new UAL to attract marginal passengers, which may pose a threat to United’s revenue premium strategy. 

And I’m concerned that 82 percent of UAL’s employees are under union contract and that the unions will eventually strangle the new airline, as they have done in the past. 

Airline stocks have not been good long-term investments – their business is cyclical; so are their earnings – and they are among the few industries that customers love to hate. I wouldn’t own the stock.

Meanwhile, it’s time to swallow the bullet on those frequent flyer miles. As this goes to press, United and Continental are still at loggerheads and no decision has been made. If you think it was difficult redeeming them before this merger, that difficulty will be a cakewalk compared to the new confusion they will create.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate Web site at www.creators.com.
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