United's Note to US Airways: Mergers Can Be Ugly
The big difference was the number of years since the carriers engaged in mergers. US Airways began a merger with America West in 2005, Delta began a merger with Northwest in 2008, and United began a merger with Continental in 2010. They all created problems, but United's problems were not only the worst but also the most recent, consuming the airline in 2012 even as Delta and US Airways soared and American (AAMRQ.PK) worked its way through a largely successful bankruptcy reorganization.
United executives reiterated Thursday that not only did the merger bring higher cost and lower revenue in 2012, but also labor costs will rise in 2013 as a result of new contracts that resulted at least partially from the merger.
On the United call on Thursday, CEO Jeff Smisek called 2012 "the toughest year of our merger integration" and said, "We are absolutely not satisfied with the financial results we produced last year."In its summer schedule, United sought for the first time to fully merge operations of the two airlines. Operational performance plummeted, reaching a low in July when the carrier's 64% on-time arrivals rate was the worst in the industry. Problems included the introduction of new fleet types in various stations, unaccompanied by the introduction of appropriate jet bridges; a series of computer glitches; and a reduction of the number of spare aircraft in the fleet. One result of the latter miscalculation: in the second week of July, 300 passengers were stranded in Shanghai for three days. To compensate, United invested heavily in resolving its problems -- adding extra spare aircraft, boosting aircraft flying time and ground time, and increasing staffing. Said Rainey, "We have attacked some of our operational problems with a blunt instrument -- we've thrown head count at (them)." As costs rose, revenue fell, because passengers, particularly corporate customers, were booking away. "The operational challenges we faced last summer influenced corporate customers," Rainey said. "Some of our corporate customers took a detour while the road was under construction." United said its passenger revenue per available seat mile rose just 1.7% during the year. "The biggest disappointment from my perspective was the revenue 'dis-synergies,' " said Jim Compton, chief operating officer. Lost revenue cost United "one or two points in RASM that we underperformed," he said. During the year, Delta PRASM rose 7%, AMR PRASM rose 5.8%, and US Airways PRASM rose 3.9%. One final metric: Instead of a targeted goal of a 10% return on invested capital, United came in at 8%, executives said. This year, several analysts are recommending United, saying the problems have passed. But S&P Capital IQ analyst Jim Corridore retained a hold on the shares. "We see improvement this year and expect UAL to narrow the gap between itself and peers on revenue performance," Corridore wrote Thursday, in a note. But, he said, "UAL's ongoing integration challenges keep us cautious on the shares, despite our positive view on the overall U.S. airline industry." Corridore has a price target of $26. Shares closed Thursday at $25.54. One factor in 2013 expectations is that costs will rise due to improved labor contracts, some already signed and some still being negotiated. Rainey said United's 2013 cost per available seat mile, excluding fuel and special items, will rise between 4.5% and 5.5% this year, with 2.5 points of that related to new labor agreements, including a pilot contract that eliminated some of the concessions made during United's bankruptcy. Rainey called that a "mark to market adjustment." At the moment, US Airways pilots are voting on a memorandum of understanding that would temporarily do the same thing, bringing their wages to American levels. A longer-term contract would follow. It is worth recalling that the Delta and US Airways mergers encountered early problems. Delta, for instance, had the worst on-time record among major carriers in 2010. Delta shares, which traded near $11 when the merger was announced in April 2008, spent almost all of 2009 trading in the single-digits and fell as low as $3.51 in March 2009. Analysts kept saying, "They need more time." As for the America West/US Airways merger, it started out well as route consolidation produced sharply higher RASM. But in 2007 US Airways' on-time performance was the worst in the industry, largely because of a March 2007 computer meltdown resulting from the effort to merge two computer systems. Also, the failure to successfully complete pilot seniority integration has been a lingering embarrassment, one that could resurface as US Airways and American pilots seek to merge their seniority lists. Follow @tedreednc -- Written by Ted Reed in Charlotte, N.C. >To contact the writer of this article, click here: Ted Reed
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