Tuesday, September 29, 2015

Business Implications of Power in Mergers: The Case of the New United Airlines

Ideally, a merger combines the best features of one company with those of another company such that the whole is of greater value than the sum of the two parts. Optimal combination as such may imply or at least depend on a rough power-balance between the two adjoining companies, for otherwise distended dominance could translate into the worst of one company (i.e., the dominate one) being foisted onto the merged entity. The opportunity cost, or benefit lost in going with the worst of the dominant company, could be measured by the extent to which the same function in the other company is better than that of the dominant company. Put another way, it would make no sense to go into a merger planning to let each company continue to do what it does worse than the other. Sadly, power can eclipse economic criteria even in a company. The merger of Continental Airlines and United Airlines provides a case in point.

According to The New York Times, “The merger . . . was supposed to combine Continental’s reputation for solid customer service with the broader reach of United’s domestic and international network. Instead, [the merger turned into] an exercise in frustration for [the] fliers, with frequent delays, canceled flights, and lost bags.”[1] Customer unhappiness is a pretty good indication that something went horribly wrong in the formation of the combined company.

One business passenger, a frequent flier, provides us with a synopsis. “Continental was probably the best airline . . . that you could travel on pre-United. I would say United is one of the lowest.”[2] Specifically, he cited poor service, bad wifi connections, and cut-backs on perks and upgrades that evince little appreciation for frequent fliers. “I feel that at 100,000 miles, somebody should care and make me feel like a valued customer. You’re treated as just a commodity, and it’s a race to the bottom. They don’t really appreciate me at all.”[3] He would have quickly switched to another carrier, but the new United held 70 percent of all routes in and out of Newark, his main hub, at the time. Monopoly in a market, and perhaps even oligopoly, may enable sub-optimal merged companies to continue when they otherwise would have gone bankrupt.

United's "Love in the Air" promotion highlighting couples who met in the air. The case of the winning couple pictured here just happens to involve an "upgrade." The love in the air does not refer here to the employees on board or at the gate, even though the impression intended may be that flying United is a loving experience. (United Airlines)

In any case, the poor service of the pre-merger United somehow trumped Continental’s excellent service in the combined airline; the sordid mentality survived the salubrious one. Behind this dynamic lies dominance, or power, disproportional, I submit, from the standpoint of an optimized merged company according to business criteria—that is to say, power over effectiveness. Lest it be presumed that business principles and calculation play a predominate role mergers, the management of the power dynamics should not be left out of the equation.

[1] Jad Mouawad and Martha White, “Despite Shake-Up at Top, United Faces Steep Climb,” The New York Times, September 15, 2015.
[2] Ibid.
[3] Ibid.