The Devil’s in the Details: A Change Management Fable

How do I get out of this merger?

HOUSTON AND CHICAGO, May 3, 2010 – Continental (NYSE: CAL) and United (NASDAQ: UAUA) today announced a definitive merger agreement, creating the world’s leading airline with superior service to customers, expanded access to an unparalleled global network serving 370 destinations around the world, enhanced long-term career prospects for employees, and a platform for improved profitability and sustainable long-term value for shareholders.

The all-stock merger of equals brings together two of the world’s premier airlines, creating a combined company well positioned to succeed in an increasingly competitive global and domestic aviation industry…The holding company for the new entity will be named United Continental Holdings, Inc. and the name of the airline will be United Airlines. The marketing brand will be a combination of the brands of both companies. Aircraft will have the Continental livery, logo and colors with the United name, and the announcement campaign slogan will be “Let’s Fly Together.”

“Today is a great day for our customers, our employees, our shareholders and our communities as we bring together our two companies in a merger of equals to create a world-class and truly global airline with an unparalleled network serving communities worldwide with outstanding customer service.  This combination brings together the best of both organizations and cultures to create a world-class airline with tremendous and enduring strengths…”

And so went the press release announcing the “merger of equals,” United Airlines and Continental. This article is not focused on whether or not the merger was or was not a good idea. Instead, the purpose of this note is to emphasize the challenge of change management when one gets down to the nitty-gritty details of specific processes, practices, habits and policies. Mergers are nothing if not extreme cases of the management of change, which is to say, they are exercises in the containment of risk and the attempt to keep chaos and failure at bay.

I do not know much about the then United CEO, Glenn Tilton, nor the Continental CEO, Jeff Smisek, who by agreement became the new United’s CEO. If we give them the benefit of the doubt that they are intelligent and hard-working executives, we cannot, however, be struck by the banality of the predictable phrases in the press release above, the exhortations of “world-class” aspirations, of the benefits to long-term shareholder value creation and the creation of an “unparalleled global network.” Were it so easy.

Fast forward over a year later, in the middle of 2011, and Bloomberg reporter Drake Bennett wrote about the incredible level of detail that United and Continental staff were (and are) working through to make the merger happen operationally. Here’s one vignette, the saga of the coffee selection, and the customer, employee, and process impact of a quarter-inch:

Last July, 14 months after United and Continental Airlines announced they were combining to form the largest carrier in the world, the merged airline took one of the thousands of steps required to integrate its fleet: It harmonized the coffee. Just as each carrier had its own logo, slogan, and peerage of frequent-flier status levels, each served its own blend of joe. Continental’s coffee was from a company called Fresh Brew, United’s was from Starbucks.

“The new United,” as the merged airline called itself, had to choose. With one food-service supply chain, it made no sense to maintain two coffee contracts. And buying from one source offered the possibility of bigger volume discounts, exactly the sort of savings that United and Continental executives had hoped to create with the merger. The coffee question represented a tiny aspect of the problem of running an airline, but the quantities were huge: Last year the new United sent enough coffee into the sky to brew 62 million cups.

The vice-president in charge of food services at United is a slim, chipper woman named Sandra Pineau-Boddison. She considers herself a coffee enthusiast “only if you count mochas as true coffee.” Still, Pineau-Boddison did not take United’s coffee decision lightly. For months the issue dominated the meetings of the beverage committee, a 14-member panel drawn from procurement, flight operations, finance, food services, and marketing. United’s head chef, a burly, bearded Irishman named Gerry McLoughlin, sat in. The committee solicited bids, then came up with 12 different blends to try. Members tasted them blind, and, in an affront to Pineau-Boddison’s sweet tooth, tasted them black.

By mid-2011 there was a front-runner: a lighter roast Fresh Brew blend called Journeys. It was cheaper than the old United’s Starbucks, and it did better in the taste tests. When colleagues outside the beverage committee were asked to weigh in, they concurred. The new United’s chief executive officer, Jeff Smisek, dropped by the food services floor for a cup and signed off on it. Journeys was served at a meeting of the company officers to general approval. Just to be sure, food services took the new blend on the road, to Washington Dulles, Chicago O’Hare, Denver, Los Angeles, and San Francisco, asking flight attendants to try it. Out of the 1,100 who did, all but eight approved. “We thought this was a home run,” says Pineau-Boddison.

On July 1 the new United introduced its new coffee. Fliers on the “legacy United” fleet, accustomed to Starbucks, let out a collective yowl of protest. Pineau-Boddison had expected some resistance—Starbucks, after all, is a popular brand—but this was something else. Flight attendants reported a barrage of complaints. Pineau-Boddison received angry e-mails from customers, as did Smisek. The coffee, fliers complained, was watery.

The beverage committee launched an inquiry. The coffee itself, they discovered, was only part of the problem. Airplane coffee is made from small, premeasured “pillow packs” that sit in a brew basket drawer at the top of the galley coffee machine. When the drawer is closed, boiling water flows through the pillow into the pot below. The old United brew baskets, the committee discovered, sit a quarter of an inch lower than Continental’s, leaving a space for water to leak around the pillow pack. That fugitive water was diluting the coffee—in fact, the old United had installed the deeper brew baskets for that very purpose, after passengers complained that their Starbucks was too strong. And so, by the end of the year, the beverage committee found itself back where it had started, trying out new pillow packs.

This is but one of the countless details of change that have and are consuming millions of dollars of time and energy (whilst still running an airline). Regulated, facing razor-thin margins, a highly perishable product (once an aircraft pushes back from the gate every unsold seat is lost product), major operational complexity, safety issues, contentious union relations, highly disruptive commodity prices (fuel etc.) high capital costs, many competitors (many of whom are state-owned with governments willing to fund unprofitable airline operations indefinitely and who also control landing rights) – running a profitable airline takes supreme operational expertise and highly talented leadership.

The next time you either read about a merger or are suddenly in the middle of one, you might want to keep the coffee vignette in mind, especially if the leaders seem to think the merger will (or needs to) go like clockwork. Here’s how the coffee issue ended up:

On March 1, 2012 United will launch its new coffee. Again, it’s a Fresh Brew blend, Kova, but a medium roast rather than a light roast. And it will come in a slightly larger pillow pack—2.5 ounces rather than 2.25—to ensure a stronger brew. Pineau-Boddison considered replacing the old United brew baskets, but she thinks the new coffee will be a faster fix. Asked whether this just means coffee drinkers on legacy Continental planes will be complaining that their coffee is too strong, she points out that this time the airline tested the coffee inflight, in legacy United and Continental planes. The response has been good. Still, she is holding her breath. “I got an e-mail from someone recently that said, ‘It’s not rocket science,’” she says, “and I thought, no, it’s a little bit of rocket science.”

When it comes to change management  (see also Change Management is Risk Management) I always recall this little rhyme:

For want of a nail the shoe was lost.

For want of a shoe the horse was lost.

For want of a horse the rider was lost.

For want of a rider the message was lost.

For want of a message the battle was lost.

For want of a battle the kingdom was lost.

And all for the want of a horseshoe nail.

 

Got a spare nail?

 

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