) -- The thought was that
(UAL - Get Report)
got past most of its merger problems during a troubled first quarter and could, in the second quarter, begin to move on.
This didn't occur.
On Thursday, United shares closed at $19.20, down 6%, by far the airline industry's biggest decliner, on a day when shares in most carriers gained, led by a 3% gain at
(HA - Get Report)
. Year to date, United shares are nearly unchanged, while the
NYSE Arca Airline Index
is up 6%.
Perhaps United's continuing problems following a 2010 merger with Continental are best illustrated by a heavily reported incident during the second week of July, when more than 300 passengers were stranded in Shanghai for three days due to a series of mishaps involving United aircraft.
The passengers were scheduled to fly Shanghai/Newark on Wednesday. The flight was canceled due to a mechanical problem. The problem was not fixed by Thursday. On Friday, it was fixed, but boarding was delayed and the crew timed out, meaning it could no longer operate the flight under federal safety standards that limit crew hours. Passengers finally departed on Saturday, three days late, arriving in Newark the same day.
"We're just all exhausted," passenger Steve Borowka told
The Newark Star Ledger.
"I've been going to China since 1988, I've never experienced anything close to this. It was like being in an alternate universe."
The flight, of course, occurred shortly after the conclusion of the second quarter. It was not mentioned specifically during United's earnings conference call. But some of the airline's other operational failures were addressed as United executives described an ill-fated move, since temporarily rescinded, to reduce the number of spare aircraft in the fleet.
"We've stumbled a bit on some of our completion levels as we brought down spares," said CEO Jeff Smisek. "We are going to add the spares back."
For the quarter, United missed estimates, earning $1.41 a share, excluding special items, when analysts surveyed by Thomson Reuters had estimated $1.66. Two days before reporting earnings, United disclosed that special items related to merger expenses would cost $206 million during the quarter.
(UAL - Get Report)
both beat second-quarter estimates, and US Airways reported its best quarter ever, beating records for net income, both including and excluding items, set in the second quarter of 2006. Bankrupt
also surprised the industry with strong results throughout the quarter.
As for the current quarter, United said its consolidated passenger revenue per available seat mile in July would be flat compared to the same month a year earlier. A day earlier, US Airways President Scott Kirby said his carrier's July PRASM would rise 1% to 2%, reflecting difficult comparisons with a year earlier.
Following the United call, S&P Capital IQ analyst Jim Corridore downgraded United shares to hold from buy.
"Our downgrade reflects our view that UAL's merger integration issues are leading it to underperform peers," Corridore wrote. "While we think long term the merger will bring great benefits, we have less confidence in management's ability to manage the integration in the near term."
Corridore cut his 12-month target price to $24 from $30 and his 2012 full-year earnings estimate to $2.89 a share. Analysts surveyed by Thomson Reuters had been estimating $4.53.
Smisek referred during the call to United's inadequate operational performance, which, he said "didn't meet our goals." He said changes such as introducing Airbus aircraft into Houston "added new stress to the system."
In May, the latest month for which Department of Transportation statistics are available, United's on-time rate of 77.8% was the worst for 15 reporting airlines. United also cancelled 3.8% of its flights, the highest for any mainline carrier, and had the highest percentage of mishandled bags and tarmac delays of any mainline carrier. "We hold ourselves to a higher standard than we've delivered lately, and we will return (to it)," Smisek said.
-- Written by Ted Reed in Charlotte, N.C.
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