VIKAS MITTAL, VANITHA SWAMINATHAN and CHRISTOPHER GROENING

The merger of United and Continental airlines has catapulted the company to the No. 1 spot in the industry, with 21 percent of domestic capacity. Run out of Chicago by Jeff Smisek, the combined firm will be 55 percent owned by UAL shareholders and 45 percent owned by Continental shareholders.

Many are wondering about the effect of this merger on customers and if less competition will indeed mean higher prices. The argument goes like this: Because the market becomes less competitive, firms with increased monopolistic power can raise prices and reduce quality. Consequently, consumers are less satisfied.

So far both companies plan to continue to service all existing routes and maintain all eight hubs. Because of low overlap among the routes, analysts estimate that the two airlines may cut domestic capacity by about 10 percent. Naturally, this will make it easier for the entire industry to raise fares. On the other hand, lowered fixed costs of the combined entity will also make it possible to compete more aggressively for leisure customers, who are typically more price sensitive.

A more important test, however, is what will happen to service quality and customer satisfaction. Customer satisfaction, after all, is not about fares alone — it encompasses a range of services such as baggage handling, ticketing and check in, treatment by the staff and on-time arrival of flights, to name a few. In other words, even after raising fares, will customer service be degraded? Do mergers inevitably lead to lower customer satisfaction?

Today, this question can be addressed directly with the American Customer Satisfaction Index, which allows us to measure customer satisfaction from the customers’ point of view. Collected by the University of Michigan, the ACSI is a broad measure of customer satisfaction that relies on extensive input from customers in a survey based on their actual experience with a company. More than 250 customers per company rate their satisfaction, which is then reported as an index (0-100, with 100 being the highest score). To test if customer satisfaction declines after a merger, we compared the ACSI scores of firms before a merger to the same firm after a merger and to other comparable firms that did not undergo a merger. If mergers indeed hurt customers, ACSI scores for customers of firms that underwent mergers should decline relative to customers of comparable firms that did not undergo a merger.

Between 1996 and 2003, there were 285 “horizontal mergers,” i.e., mergers within the same industry. To our surprise, there was no statistically discernible change in customer satisfaction before and after a merger. The premerger score was 76.49 and the post-merger score was 76.11. The difference was so small it could have occurred merely by chance. Furthermore, the satisfaction scores for customers with nonmerged firms were similar (76.75) to those of merged firms. This pattern was immune to industry type and industry competitiveness.

As the CEO of the merged entity, Smisek will have many tough choices to make. One of the key challenges will be to integrate the two merged firms not only in terms of operational and logistical issues, but more important, in terms of people issues. In the latter, choices must be made whether the customer-oriented processes at Continental or United should get precedence. Evidence shows that when it comes to customer satisfaction, Continental is superior to United.

We compared customer satisfaction scores from ACSI for both airlines with the score for Southwest, the best in the industry. Even taking into account a dip in Continental’s ACSI score (62) in 2008 related to Hurricane Ike, Continental has a consistently higher score than United, whose ACSI score that year was only 56. In 2009, Continental scored 68 – 12 points higher than United. We also compared passenger complaint data, adjusted for passenger volume. It paints a similar picture. Continental has a consistent pattern of lower complaints than United. Data on baggage claims, flight delays and so on tells a similar story.

Somehow, the culture, people and processes at Continental are more aligned and geared toward superior customer satisfaction and fewer complaints. External evidence bears this out, and the process of integrating the two firms must recognize it. Closely understanding what it is about the customer-oriented culture at Continental, and nurturing it within United, will be a big win – in the long run – for the new firm.

As a CEO interested in the long-term value of the organization, Smisek recognizes that the largest source of cash flows for the airlines is the customer base. Shareholders of firms with a stable, growing and satisfied customer base are rewarded with healthy market valuations. Over time, CEOs are hardly likely to outsmart the market by reducing customer satisfaction.

Mittal is the J. Hugh Liedtke Professor of Marketing at Rice’s Jones Graduate School of Business; Swaminathan is theRobert W. Murphy Faculty Fellow in Marketing at the University of Pittsburgh’s Katz Graduate School of Business; and Groening is an assistant professor of marketing at the University of Missouri’s Robert J. Trulaske Sr. College of Business.