United Airlines and Continental Airlines merged to form United Continental (NASDAQ:UAL) in late 2010. In the early days of the merger, then-CEO Jeff Smisek optimistically predicted that the company would reach new joint collective bargaining agreements with all of its unions by the end of 2011.
Yet when Smisek was pushed out last September -- nearly five years after the merger became official -- United had still failed to reach joint contracts with its flight attendants and mechanics. Not surprisingly, this led to a lot of labor discontent.
New United Continental CEO Oscar Munoz has made improving labor relations a key priority. In the past nine months, he has made tremendous progress on that front. On Friday, the company took another step forward, reaching an agreement with the Association of Flight Attendants for a joint contract covering all of United's flight attendants.
United needs to reenergize its flight attendants
Flight attendants aren't the highest-paid airline workers. But they are some of the most important employees for an airline like United, because of their impact on the customer experience. Flight attendants are less likely to provide consistent high-quality service if they feel underappreciated by their bosses.
This has been a significant problem for United in the past five years. In an investor presentation last week, management admitted that spotty service has contributed to United Continental losing market share among "premium" customers.
United is investing lots of money to win back these customers. Earlier this month, it announced a big upgrade to its international business class seats and amenities. It will also open new "Polaris" lounges at nine key international airports for its business class customers. United has even upgraded the coffee it serves onboard and in its lounges.
All of these investments will be in vain if United Continental's flight attendants don't provide attentive service. Implementing a new joint collective bargaining agreement with higher wages could help motivate flight attendants to offer better customer service.
Separate contracts drive up costs
Beyond the morale benefits of implementing a new contract, having flight attendants working under two separate contracts is costly. With separate contracts, flight attendants from the old United Airlines can only work on aircraft from pre-merger United, while flight attendants from the old Continental Airlines can only work on pre-merger Continental aircraft.
This limits the company's flexibility to move flight attendants around within the route network, creating inefficiencies that translate into real costs.
In a particularly blatant example, United Continental recently started flying a 787 Dreamliner -- a plane designed for long-haul international routes -- on the Newark-Los Angeles route. The reason? It is the only Dreamliner assigned to pre-merger United flight attendants right now. It takes two airplanes to serve most long-haul international routes, so this plane has to be used for domestic service until United gets more 787s.
The company also recently agreed to pay $3 million in compensation to pre-merger United flight attendants because it had accidentally started flying this 787 with pre-merger Continental flight attendants.
These are clearly useless costs. A joint contract would allow United to optimize flight attendant work assignments. The resulting cost savings should partially offset the raises that flight attendants will undoubtedly be receiving in the new agreement.
Still some work to be done
While United is close to reaching its goal of a fully integrated flight attendant workforce, the agreement is not a done deal yet. United Continental and the AFA are still finalizing the contract language, after which union leaders are expected to approve the agreement.
After that, the tentative agreement will need to be ratified by a majority of the flight attendants. That's far from guaranteed. Many airline labor groups have rejected tentative agreements in the past few years, holding out for better terms. United's mechanics did just that back in February.
However, if United Continental's flight attendants do ratify the tentative agreement, it could mark a major milestone in the company's comeback. With an engaged and motivated cadre of flight attendants, United can finally start the hard work of winning back lucrative premium customers.
Adam Levine-Weinberg owns shares of United Continental Holdings. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.