United Bucks Industry Keeping First-Class Seats After Merger

United Airlines will keep three-class cabins on some wide-body jets, separating itself from some peers switching to two tiers of service, as its meshes fleets with Continental Airlines after their merger.

Retaining first-class seats on current United planes is best for the international routes where passengers are willing to pay top prices, Chief Executive Officer Jeff Smisek said. While Continental’s jets have only business and coach seats, 57 United aircraft have first-class cabins as well.

“There are certain markets in which that makes a lot of sense and there are others where it doesn’t,” Smisek said in an interview at the Chicago headquarters of United Continental Holdings Inc. (UAL) “We’ll have a good mix of aircraft and we can move those aircraft around.”

Choosing cabin layouts is a pivotal step as the carriers blend operations into the world’s largest airline after their October merger. Keeping first class is a departure from peers dropping all or most of the seats, as Australia’s Qantas Airways Ltd. (QAN) did in 2010, or Continental and Delta Air Lines Inc. (DAL) did years earlier.

Premium passengers are airlines’ lifeblood, because they usually pay the highest fares, tend to travel on short notice and fly more often. Carriers with only two classes of service often call their top cabin “first/business.”

Photographer: Aaron M. Sprecher/Bloomberg

Jeff Smisek, chief executive officer of United Continental Holdings Inc., points to a Boeing Co. 737-924 extended range jet bearing United Airlines livery and the Continental Airlines logo (unseen) following its arrival as the inaugural flight for United Continental on Oct. 1, 2010. Close

Jeff Smisek, chief executive officer of United Continental Holdings Inc., points to a... Read More

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Photographer: Aaron M. Sprecher/Bloomberg

Jeff Smisek, chief executive officer of United Continental Holdings Inc., points to a Boeing Co. 737-924 extended range jet bearing United Airlines livery and the Continental Airlines logo (unseen) following its arrival as the inaugural flight for United Continental on Oct. 1, 2010.

United is charging $17,471 for a walkup, first-class ticket between San Francisco and Beijing, and $1,993 for a coach seat, according to the carrier’s website. A business-class fare, with more amenities than an economy ticket, is $7,076.

‘Superb Name’

While the parent company uses the United and Continental names, its jets will be repainted using only the United name, along with Continental’s globe logo. Part of the reason for keeping both names at the corporate level is travelers’ awareness of United’s first-class service, Smisek said.

“Internationally, the Continental name is not well known, and the United name is a superb name offshore,” said Smisek, 56, who became CEO of Houston-based Continental about four months before the merger was unveiled in May 2010. “We tried to meld the two, because the international business is an important part of our business.”

About 40 percent of the airline’s $7.2 billion in first- quarter passenger revenue came from international flying. United Continental expects the merger to create as much as $1.2 billion in so-called synergies, including about $900 million in incremental new revenue.

Lie-Flat Seats

United has first-class cabins on some of its Boeing Co. (BA) 747s, 767s and 777s, joining AMR Corp. (AMR)’s American Airlines as the only major U.S. carriers with three service levels on some flights. The combined United Continental has 1,260 planes, counting regional aircraft. It has 120 jets with lie-flat seats in first and business class, more than any other U.S. airline.

Flying jets with different cabin configurations will mean matching the jets with the routes on which some passengers are willing to pay for first-class tickets, instead of getting the seats through an upgrade, Smisek said. Airlines reward their most-frequent fliers with top-tier seats when available.

United also will have to work to minimize any confusion among travelers hoping for a first-class upgrade only to find that their jet has just business class and coach, he said.

Sixty-three of Continental’s Boeing 777 and 757-200 jets have flat-bed seats in business class, similar to those offered by Delta. Continental’s fleet of 767 planes has older, cradle- style seats.

Spare Planes

That means juggling backup aircraft to ensure that spare planes have flat-bed seats for routes to London’s Heathrow airport, where Continental guarantees the availability of that option.

“You could have an equipment swap with a 767 and someone gets an old seat and is disappointed,” Smisek said. “That’s a problem with differentiated products. We will have to deal with that. We have to make sure customers understand the products on which we have which seats.”

Continental’s cabin upgrades before the merger, including the installation of lie-flat seats, “blurred some of the distinction” between first and business class, Chief Revenue Officer Jim Compton said in an interview.

“There are a lot of markets that work in two-class, and Continental has been really successful with that,” said Compton, who came from Continental. “We have United 747s that have gone through a real recent reconfiguration with flat-beds in both first and business. So we’ll have both.”

Extra Legroom

The combined carrier decided earlier to keep United’s “Economy Plus” seats in the coach cabin, which offer as much as 5 more inches (13 centimeters) of legroom for as little as $9, and add similar seats to Continental planes.

Smisek said he was initially “suspicious” of Economy Plus and thought the combined carrier would drop it, until he learned about the option’s profitability after the merger was completed.

“Going into the transaction a year ago, I would have guessed it would come out the other way,” Smisek said of Economy Plus. “When we got the facts and got the merchandising folks together to talk about how we could market the product effectively -- and this wasn’t even weighing at all the loyalty value, just the pure money -- it’s a very good business decision for us.”

United Continental slid 11 cents to $24.15 at 4:15 p.m. in New York Stock Exchange composite trading. The shares have risen 1.4 percent this year.

To contact the reporter on this story: Mary Jane Credeur in Chicago at mcredeur@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

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