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United Labor Tension Damps Promise of $1.2 Billion in Airline-Merger Gains

United Continental Holdings Inc. (UAL) is struggling to unify two union workforces more than a year after the $3.47 billion all-stock combination that created the world’s largest airline.

Chief Executive Officer Jeff Smisek accused some pilot union leaders yesterday of “shameful” complaints about flight safety, two days after the group sent a 105-page letter to Congress saying that a lack of training on new procedures was “potentially dangerous.”

The exchange spotlighted labor tensions at the carrier as Smisek stitches together predecessor carriers United Airlines and Continental Airlines. Reaping the full $1.2 billion in promised merger savings and new revenue won’t happen until all unions combine and have common work rules and pay scales, said Gary Chaison, a Clark University labor professor.

“It’s a black eye on the merger,” Chaison said by phone from Worcester, Massachusetts. “Labor issues are often the most contentious part of a merger, and this might make some people wonder whether it’s a priority for management or not. It’s also more uncertainty for the investment community.”

United Continental won’t start talks with the joint union leadership for ramp workers until December, 14 months after the merger closed. Bargaining probably won’t begin until 2012 with joint leaders for flight attendants and mechanics, and United and Continental pilots have separate Air Line Pilots Association chapters.

Shares Fall

Shares of the Chicago-based parent company have missed a U.S. stock rally in the weeks since United’s ALPA group sued the company unsuccessfully on Sept. 26 to block new procedures for plane movements such as taxiing and takeoffs, asserting that they had received too little training.

United Continental has fallen 19 percent since Sept. 23, the last trading day before the suit, compared with a 9.5 percent drop in the Bloomberg U.S. Airlines Index and a 7 percent gain in the Standard & Poor’s 500 Index. The shares rose 0.2 percent to $16.59 in New York trading today.

“New contracts cost more, yet they allow you to fully integrate operations and there’s real benefit and value in that,” said Philip Baggaley, a Standard & Poor’s debt analyst in New York. “It’s something investors would want to keep an eye on.”

Chicago Headquarters

The company won’t specify how much of its planned $1.2 billion merger synergy target relates to labor. The airline kept United’s Chicago headquarters and name on its jets, with Continental’s globe logo on the tail. The carriers must fly separately until the Federal Aviation Administration grants a single operating certificate that the company expects this year.

While United has retreated from an earlier goal of getting some labor deals done in 2011, new contracts remain a priority, said Megan McCarthy, a spokeswoman.

“We want agreements with all of our employee groups,” McCarthy said. “But we must have agreements that are fair to employees and fair to the company.”

United Continental’s 70,000 hourly employees make up 80 percent of the workforce. The new airline’s challenges go beyond typical flashpoints such as pay and benefits.

The Machinists, which represents gate and reservations agents at the old United, waited almost a year after the merger for an election to settle whether the union would add its non- union Continental peers or be shut out at the new airline.

Union Disputes

Attendants and ramp workers had different unions that fought for months over representation at the combined company, and the two ALPA chapters haven’t been able to agree with management on work rules and or how to mesh their seniority lists.

Pilots and the airline were $1.3 billion apart on pay and work rules in initial proposals for a unified contract, according to a company website. In August, pilots rejected a proposal for a 90-day bargaining session with unresolved issues going to arbitration, which the airline hoped would expedite negotiations.

The letter to U.S. lawmakers this week came from United’s ALPA group, which also filed the September suit. Smisek said FAA approval of the new practices showed safety isn’t in question.

United’s ALPA leaders “are crossing a line that is shameful and inappropriate between safety and industrial relations,” the CEO said yesterday at the Wings Club in New York. “If there are ever any legitimate safety concerns, I assure you we will be responsive.”

Pilot Discontent

Some of the pilot discontent is directed at Smisek, who ran Houston-based Continental before the merger. Pilots recently circulated a doctored photo of a Continental jet showing the 57- year-old CEO with a can of spray paint and graffiti on the plane reading, “Jeff wuz here.”

Some progress is being made. Expedited mediation is under way with attendants at the old United in hopes of reaching a short-term accord before talks with the combined United- Continental attendant leadership in early 2012.

Last week, management reached a tentative agreement with the 5,500 Teamsters-represented United mechanics and said joint negotiations with the combined union leadership are planned.

Smisek has been adamant that United Continental won’t repeat past mistakes when executives agreed to contracts they couldn’t afford during weak economic cycles.

Bankruptcy-Era Contract

The former United reached such a contract in 2000 that gave pilots raises of as much as 29 percent, to $268,000 annually. The company filed for bankruptcy two years later and pilots accepted pay concessions of 40 percent. United pilots are still working under the 2003 bankruptcy-era deal.

“Employee expectations exceed the company’s ability to write the check,” said William Swelbar, a research engineer at Massachusetts Institute of Technology. “If United does a bad deal and goes back to the historic pattern, when times get tough they’re going to have to take some of it back.”

A new agreement can’t require more givebacks, said Captain Wendy Morse, a 26-year United employee and chairman of that airline’s ALPA leadership council. Management’s effort to impose Continental’s more-demanding work schedule also is a non- starter, she said by telephone.

“Continental pilots don’t want it and United pilots certainly won’t go for it,” Morse said.

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

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

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