The biggest airline in the world

Abstract

The merger of United Airlines and Continental Airlines on 1 October 2010 created the world's largest airline. One reason to merge is to reduce costs and one way to do that is by consolidating information technology (IT) systems. Because airlines operate 7x24x365, their systems are notoriously complex and highly integrated. This paper discusses how the IT systems were merged, the project management practices used, and the challenges encountered.

Background

On 2 May 2010, United and Continental entered into a ‘merger of equals’ agreement (UAL, 2010). The agreement was executed on 1 October 2010, forming United Continental Holding Inc. (United). Because both airlines had so much debt, the combined assets of US$3 billion was considered small compared with other headline mergers; yet, it is considered the world's largest by Revenue Passenger Kilometers, with revenue of over US$37 billion and a fleet with 692 mainline aircraft with 1,269 total planes, serving 370 destinations in 59 countries (ATWOnline, 4 May 2010). In 2011, United (UA) carried more traffic than any other airline, operating more than two million flights carrying 142 million passengers. (UAL, 2012)

In May 2010 United Airlines Chairman, President & CEO Glenn Tilton told employees that he and Continental Airlines Chairman Jeff Smisek will head an ‘integration planning team’ that would begin laying the groundwork for combining the airlines. Tilton emphasized “integration will not occur until after we have gained approval for the merger and closed the transaction,” but said, “planning for the integration will be critical to ensuring a smooth transition.” (United Continental Holdings, 2010)

Integration Management Office (IMO)

The role of the IMO is to align people, process, and systems with integration objectives. PWC describes an IMO as “the glue that holds an integration together; it is the nerve center of the effort. It serves as the central touch point for every function and individual involved…. An IMO staffed by experienced resources and a common timeline and methodology is necessary to ensure an integration stays on course and the people involved in the effort focus on the right things at the right times.” (PWC, 2012) If you find this similar to a Project or Program Management Office, you would be right.

Exhibit 1 – Integration Management Office (IMO) Structure

Pete McDonald and Lori Gobillot, Continental staff VP and assistant general counsel, were selected to co-lead integration planning and report to the steering committee. Gollilot was given the title VP-Integration. The integration management office structure is shown in Exhibit 1.

In the merged companies, the Integration Management Office was, “responsible for day-to-day integration planning and recommendations.” The IMO was also supposed to “focus on identifying key strategic opportunities, including fleet planning, capital structure, product/service strategy, and processes to create a stronger airline better positioned to succeed in the competitive global aviation industry. (United Continental Holdings, 2010)

Governance

The IMO made all integration planning recommendations to the Integration Steering Committee. The Committee was then to review and approve them. The goal was to “ensure the best possible integration solutions for each work stream.”

In its Q2, 2010 earnings call, the CFO of UA said, “Merger planning work is well underway ...We're pleased with the progress ... We've established about 30 functional integration teams [actually 33] standing every aspect of the business and they're meeting regularly to plan for a smooth integration. Each team is comprised of representatives from both companies, driving a very collaborative process as we determine the operating processes and the product offerings of the new company. The focus of every team is to build an integration plan that will allow for us quick implementations, post close, ensuring that we have a seamless transition for our people and our customers as well as early synergy capture as we bring the two companies together.” (Business Travel News, 2011)

Soon after being appointed VP-Integration, Gobillot began holding 20-minute meetings with each team, which included personnel from both airlines. Members included managers from technology, labor, fleet management, network planning, and other departments, and were structured around operations, commercial activities such as the Chase credit-card partnership, and finance. “It was kind of like speed dating,” says Gobillot (Credeur, 2011). Blackberries were used for communication. A typical day for Gobillot: 27 meetings and phone calls, some of which overlapped. (Credeur, 2011)

In an earlier merger attempt with Continental, Gobillot had used ‘electronic data rooms’ so the companies could share confidential information. This information had been archived and during the merger talks in 2010, the data were recovered and used, saving substantial time. Her approach included ensuring personnel from both airlines were on each team; being fact-based, direct, and objective and using color-coded to-do lists for herself. If a team hit a roadblock, she postponed the next meeting for a week and invited more senior managers to join the deliberations.

Project Management

Bain & Company was hired for management advisory services. For project management, a Houston firm that had done work for Continental in the past was selected. Enaxis Consulting was engaged to design, implement, and manage the IT IMO for the IT merger. The office is responsible for overseeing the success for the large scale IT merger and part of the responsibilities were to:

Beginning in July 2011, they conducted a visioning workshop for the IT Business Office leadership team. Work continued for seven months, through January 2012 and included

• Developing a Stakeholder Engagement Plan for the IT PMO

• Developing a Communication Plan for the IT PMO

• Developing Operational Models. Communication included

• Overview presentations for the IT Business Office teams, and

• Documenting IT PMO processes.

Other work included developing a solution for resource estimation for merging the technical capabilities of Passenger Services System (PSS) of United and Continental Airline.

Communication

The IMO issued bulletins on United's and Continental's internal websites. A Merger Information Center was set up as part of the website so employees could learn the merger news. The Merger Information Center outlined the 33 ‘functional integration teams’ and leaders that will be working on the integration process. Team sizes were large, with as many as fifty peopl]e on a team – or more. CEO Jeff Smisek posted updates on Jeff s Journal on the Continental Airlines intranet website. (United Continental Holdings, 2010).

United sent out periodic updates to travel agents, including one five days before the cutover, entitled “UAL-CO Systems Merger: What You Need to Know.” United also published articles in “Hemispheres,” its onboard magazine, to communicate with customers; however, it did not email any details to frequent fliers regarding exact cutover dates or precautions that should be taken. It did warn its employees to avoid travel, if possible, during the cutover planned for 2 March 2012.

Applications

When merging systems, there are two of everything. To gain synergies and reduce costs, one system has to be selected. An IT Application Rationalization process has to be performed to decide which applications to use for the combined company. Multiple IT Merger strategies exist:

• Adopt IT of Firm A
• Replace IT of Firm A (with IT of Firm B)
• Synthesize IT of Firms A and B, or
• Replace IT of Firm A and Firm B.

Because of the size and history of Continental and United, systems were large-scale, multi-platform, and complex. Some systems were 40 years old, such as United's Apollo reservations system. Both companies used mainframe technology to store critical data and, over time, had layered other technologies on top, such as GUI (Graphical User Interface) and TUXEDO (messaging). The layers made the system seem more modern, easier to use, and communicate better with other systems. But they also made conversion more difficult.

Airline systems are heavily integrated. The e-commerce system, through which a passenger books a ticket, has to communicate with the reservation system, which must check the seats available inventory system and talk to the check-in system. Those four systems are called the Passenger Service System (PSS). The selection of the Continental's PSS SHARES over United's PSS had a domino effect, driving many other system selection systems decisions. Continental's website worked with SHARES. So the continental.com website was actually renamed united.com avoid the need to re-program the existing integration with SHARES (Smisek, 2011). Continental's Frequent Flyer Program, OnePass, was also integrated with SHARES. So, even though a public announcement had been made in 2011 that MileagePlus would be the merged companies frequent flyer program, the system is actually a rebranded OnePass system (McGraw-Herdeg, Michael, 2012).

Jeff Smisek explained the rational, “We picked Shares [a legacy Continental system furnished by HP] for a couple of reasons. One, we have significant intellectual property rights in Shares. And, secondly, we have spent a lot of time offloading the host on Shares—making it more web-based and less tied to the mainframe, which means we can be much faster to market with product innovations. That's the right platform for us to get to. We're not moving simultaneously to a new front-end on the system, because that means training all of the employees. So, we're only training half on the native Shares. However, I believe roughly by the end of next year we'll have the new slick front-end for everyone, and have everyone on that as well.” (Smisek, 2011) Continental retained the rights to use and modify SHARES from its outsourcing agreements with EDS. HP bought EDS and runs two partitions of SHARES. Continental uses the SHARES A partition; the SHARES B partition is for other airline customers. A GUI overlay has been developed for SHARES B, and is used by US Airways.

Other sources said SHARES was selected because it was cheaper than Apollo (Elliott, 2012). Although Smisek touted SHARES as being ‘more web based,’ a middleware product, TUXEDO, had been used for web access. The same middleware could have been used on Apollo. In addition, the time to perform tasks on SHARES was estimated to be much higher according to UA employees. “With Apollo/Fastair we can issue a ticket, check people in, and do almost any function with a few keystrokes off a menu-driven selection. With Continental, it will be long “sentence” formats for everything — check in, seat changes — and forget about ticketing. Multiply this times thousands of entries and functions, while lines build up in the lobbies and at the gates and it will be horrible for the passengers. All I can say is, good luck at the airport, especially during IRROPS” (irregular operations due to weather or other circumstances). (ATW Online, 2010)

By 30 June 2011, Gobillot's teams were tackling which systems to keep from the combined IT portfolio of 1,400 technology systems. Continental had 600 programs, while United had 800. Exhibit 2 lists key systems and which system was selected, compiled from several sources (Klint, 2010).

Exhibit 2 – Technology System Decisions

Gobillot tried to sooth hurt feelings when one company's systems were selected over the other.. “I tell them to be fact-based, and direct and objective, and keep the emotions out of it, and don't keep score,” she says. “It's not important how many things come from United and how many from Continental.” (Businessweek, 2011)

The selection of which system was chosen caused conflict. The SHARES system lacked a quick keyboard interface. United's Apollo system had FastAir, a DOS-based overlay that used function keys to speed data entry by gate agents. A project was initiated in 2010 to convert FastAir to work with SHARES; however, it was doomed to fail as the reasons for FastAir's speed were ignored. FastAir used function keys, because going back and forth between a mouse and keyboard slows the agent, and it avoided the overhead of the Windows operating system. Connectivity via 3270-host emulation may have also contributed to speed. The EVP of Technology, Keith Halbert, resigned in April 2011, four months after the selection of SHARES was announced. He had originally agreed to the decision but apparently later changed his mind. The ‘FastShares’ project was terminated soon after.

Interestingly enough, pre-merger, United had spent substantial time and effort on a Mileage Plus 2.0 Program. The program was developed over a period of about 18 months and used iterative, release-based delivery for incremental features. The goal was to create a loyalty program with leading customer functionality, best-in-class Marketing Analytics and Campaign Management capabilities. The Executive Steering Committee consisted of Executive and Senior Vice Presidents of Mileage Plus, Marketing and Information Technology. The program included a new Mileage Plus website and new products: Miles & Money, One Way Awards, and Car & Hotel Bookings. Features included Air and Non-Air Redemption and Accrual for miles earned. At its peak, over 300 resources were dedicated to the program. (Ghai, 2012) The Vice President of Mileage Plus from 2007 to 2010 made a presentation on the program at a Loyalty conference on 16 September 2010 entitled “Prepared for Take-Off: A Tailored Loyalty Program Wins One Carrier a United Front.” (Loyalty One, 2010) Much of this work was lost with the cutover on 2 March 2012. The expense of the MP 2.0 program may have been a strong reason why there was insistence by United's executive management that Mileage Plus would be the loyalty program for the merged company.

Stage Gate: A Single Operating Certificate

To operate as one airline, the U.S. FAA (Federal Aviation Administration) must approve a single operating certificate. Obtaining this certificate is then a prerequisite for other merger projects to be executed. United and Continental had five operating certificates total; obtaining even one certificate when merging is no simple feat. Six years after America West merged with US Airways, the pilots and flight attendants of the merged US Airways Group are still operating under separate contracts with different pay rates, schedules, and work rules (Credeur, 2011). Cutovers can be done smoothly though. In January 2010, Delta and Northwest merged their IT systems without major mishaps despite having to consolidate almost 1,200 unique systems into approximately 600 (NBC News, 2012).

Integrating the flight information system was vital for the merger to clear a regulatory gateway: getting a single operating certificate from the FAA. By the time the certificate was awarded on 30 November 2011 more than 500 employees had worked on the process, paring 440 manuals— governing everything that takes place before, during, and after a flight—down to 260. (Bennett, 2012)

Best Practices for IT Merger-of-equals

Four best practices for merger-of-equals for combining IT have been defined (LeFave et al., 2008):

• Credible IT Leadership

  • Early “wins” (Day 0, Day 1)

  • Constant, consistent communications

• Common Direction and Compelling Deadlines

  • “Adopt-and-Go” approach embraced by IT

  • Integration Management Office to keep IT focus on synergy targets

• Intensive Collaborative Planning

  • “Rational” process for application “domains:” Pairs of leaders, clear criteria and use of multi-criteria decision-making tool to selected “winners”

• Retention of Key IT Talent

  • In-source and reallocate people across IT units

  • Early voluntary separation package

Timeline

When the merger was approved on 1 October 2010, United said in a statement that consolidating operations will be “complex” and take 12 to 18 months. Exhibit 3 shows the actual merger timeline and key events.

Exhibit 3 – Actual Timeline for the United – Continental Merger

Testing: Dress Rehearsals

United conducted four dress rehearsals with executives staying overnight at headquarters in an attempt to determine what problems would arise after cutover and devise manual workarounds. To mitigate risk, the plan was to have extra staff at call centers and in hubs.

For the flight information systems, a final test was conducted in late October 2011. The transition team had an empty Continental 737 fly from Houston to El Paso and back just to make sure the operations center could track it. The team had the pilots pretend to have a mechanical problem and return to the gate. That showed up in the system; then it had the pilots change the flight number and reroute the plane to Austin to see if that showed up. It did. Encouraged by the dress rehearsal, United's Network Operations Center head, Jim DeYoung, set a transition date (Bennett, 2012). The cargo system held a ‘dress rehearsal’ in March 2012 to gauge readiness for the first phase of user testing. This test revealed that some customizations and interfaces were not functioning as required for a successful implementation. Subsequently, its implementation date was ‘re-planned.’

Cutover Approach: Big Bang

When systems are converted the approach is key: phased, parallel, or big bang. In United's case, they selected big bang and converted all locations and all PSS systems. They also changed policies and procedures at the same time. Did United have to make so many changes at once? But the decisions had been made; the conversion for PSS began at about 1 a.m. EST on 3 March. The carrier's systems, including its connections to its Global Distribution systems and its website functionality, went unavailable, with four hours being the expected duration of the shutdown. (McDonald, 2012)

Risks and Issues

In regulatory filings, United recognized systems integration as a key merger risk: “We may be unable to manage the complex integration of systems, technology, aircraft fleets, networks and other assets of United and Continental in a manner that minimizes any adverse impact on customers, vendors, suppliers, employees and other constituencies.” (United Continental Holdings, 2010) United took some preventive steps prior to cutover adding call center staff. The cutover was scheduled on a Saturday, a slower travel day and in early March, a lower travel period. During the four dress rehearsals, they had devised manual workarounds for potential problems.

But the volume of the world's biggest airline can overwhelm manual processes when risks become issues, and after the cutover on 3 March 2012, United had many issues. The most urgent issues related to passengers. When airport gate agents powered up their computers for check-in, the SHARES login screen greeted them. As it was Continental's system, none of United's employees had ever used it in a live setting. The character-based system, with a command line interface, slowed check in dramatically (Exhibit 4), which delayed flights.

Exhibit 4 – Sample SHARES Commands for Check-in

United also made changes to tighten upgrades to elite flyers and reduced free luggage from two pieces to one. United's call center was overwhelmed. Wait times exceeded 60 minutes. The SHARES system was sluggish under the volume and sometimes froze. Call volumes surged from 1.5 million the week before the cutover to 2 million the week of the switch, exceeding workload estimates by 10%. The length of time to resolve a customer inquiry jumped 120%. Answering inquiries took an average of 20 minutes as agents navigated the cryptic SHARES interface. That, in turn, lengthened the call queue. Martin Hand, SVP Customer Experience said “My e-mail volume was up by about 10,000%.. For the first three weeks, I would be up until midnight every day and start again at 5 a.m., answering customers.” (Elliott, 2012)

Another issue was that the conversion for loyalty records took much longer than planned. The baggage system had problems as well. Since 9/11/2001, TSA requires passenger bags to be matched with the flight on which they travel. If bags were delayed, the flight had to be delayed until they could be loaded. Slow check-in and bag delays led to late gate closure, which led to late flights and poor on-time arrival. Flight crews often work back-to-back flights. A delayed flight crew means another flight must wait for the crew. The delays began to cascade through the network, ultimately leading to flight cancellations, and generating even more calls to United's call centers.

A critical issue was missing itineraries. Passengers who did not have paper copies of their e-ticket or itinerary, and were not found in the new SHARES system could not prove they had a valid ticket. SHARES also divided companions who had made a reservation together and upgraded one person but not the other. This auto-splitting of passenger name records (PNRs) contradicted United's stated policy to upgrade both based on the higher status of one person. Other complaints included a ‘buggy’ website, check-in issues, upgrade difficulties, mileage accrual issues, and call queue times. United corporate customers and frequent flyers complained loudly on Internet forums such as FlyerTalk.com.

In the Q1, 2012 earnings call, Jeff Smisek called the SHARES cutover successful, even though the resulting service levels were not what customers expected. He said there were “a number of issues, which affected some of our customers as one would expect after a massive technology and process change like this.” He blamed the numerous simultaneous changes and that website ‘gaps’ would be closed over time. “We spent significant resources to train our reservation and customer care co-workers on the new system and policy and procedure changes, and we increased staffing levels to supportthe conversion.”

United said that most calls related to four main issues:

• When reservations were converted, some seat assignments and special meal requests were lost.

• Some passengers crossing the international dateline had some segments out of order.

• Upgrades for elite-level frequent flyers were not clearing on schedule even if space was available.

• The combining of OnePass and MileagePlus accounts took about a week.

Between May and June 2012, United planned to hire 400 contact center workers to add to the 6,300 employees who answer inquiries via phone and email. Two months after the cutover, call handle times were cut in half, to an average of 10 minutes, but still above the goal of eight minutes. (Elliott, 2012)

To reduce SHARES issues, a new interface for the system was developed and two mobile apps were developed for checking in customers and their bags and one for managing gate departures. Additional development with iterative releases are planned, with the goal of having a fully integrated user interface for our lobby and gate agents that is fast, intuitive, modern, and easy to learn and use.

To help motivate the employees who had been stressed and overworked, an award program “Outperform Recognition,” was put in place allowing customers to allows customers to nominate United employees during 2012 for outstanding performance. (Smisek, August 2012)

The issues have not stopped. A communications equipment hardware failure in United's data center on 28 August 2012 grounded airplanes for more than two hours, caused 580 delays, nine cancellations and rendered their website inaccessible. Companies that sell airline tickets using Global Distribution Systems said that they did not have access to United's real-time inventory during the outage. “ We have fully redundant systems, and we are working with the manufacturers to determine why the backup equipment did not work as it was supposed to,” United said in an email. (Lenhart, 2012)

The Continental side of the merger had a different culture than United, which is causing conflict. In 2010, a Continental managing director for IT Services, said “Our chief executive [Smisek] characterises us as ‘an IT company with wings’. Our people respond with innovative ways to use technology... We are probably more likely to put something out that is 85% correct put the functionality in place and correct it as we go down. ” (Jenner, 2010) This approach has caused friction. Customers might prefer the Airline Pilots Association view as stated by Jay Pierce, “One thing management didn't adequately deal with is recognizing we're a passenger-service industry, not just an IT company with wings.” (Crains, 2012)

Exhibit 5 – Airline Quality Rating (Bowen, 2012)

Customers have not been impressed. United and Continental were in last place based on four factors: on-time arrivals, involuntary denied boardings, mishandled baggage, and customer satisfaction.

Budget and Costs

In a regulatory filing United stated, “We expect the combined company to realize between US$200 million and US$300 million of net cost synergies... by 2013. We also expect that the combined company will incur substantial expenses in connection with the merger.” (UAL, 2010) Research presented during anti-trust litigation showed technology costs to be one of five key categories of savings.

Exhibit 6 – Estimated Cost Savings in April 2010

Expenses related to the merger are publicly disclosed in only two line items on the financial statements: ‘merger-related costs’ and ‘integration-related costs.’ Integration includes include costs to terminate service contracts, costs to write-off system assets, payments to third-party consultants to assist with integration planning and organization design, severance related costs primarily associated with administrative headcount reductions, relocation and training, and compensation costs related to the systems integration The real cost of IT systems integration is unclear. For all integration expenses, United spent US$564 million in 2010, US$517 million in 2011, and US$331 million in the first three quarters of 2012 (US$134 million, US$137 million, and US$60 million, respectively). The expenses are enough to affect the bottom line: United's second-quarter profit fell 37% because of merger costs (Businessweek, 2012). United usually provides only total integration expenses and not details on costs for the IT systems integration. An IT contract termination with Amadeus cost US$75 million to dissolve (Jonas, 2011).

Pre-merger, United paid US$60 to US$70 million annually to Travelport for using Apollo (Travelport, 2011). Continental's seven year contract with HP is worth US$550 million. Renewed in October 2007, it includes computing systems, reservation systems, legacy application development, maintenance, field services, network and voice systems, and helpdesk and desktop support. Both Continental and EDS were to work on a joint application modernization strategy. (Data Centres, 2007)

© 2013 Joy Gumz
Originally published as a part of 2013 PMI Global Congress Proceedings – Istanbul, Turkey