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What's Wrong With United Airlines? A Little Bit of Everything

Stocks in this article: AALDALUAL

Chicago (TheStreet) -- Beleaguered United (UAL) poses the airline industry's biggest question: What's wrong with United? But no one seems able to answer it with certainty.

United has generally disappointed since its 2010 merger with Continental, which former CEO Glenn Tilton chased for eight years, including three in bankruptcy. In the first quarter of 2014, United lost $489 million while rivals American (AAL)and Delta (DAL) reported record results. Earlier, earnings declined for nine consecutive quarters starting in the second quarter of 2011.

Now United is under the microscope, but no one has isolated a single cause of its continuing underperformance. Rather, it seems, a multitude of problems are to blame.

The airline's pilots have been the most vocal critics. In a letter to members in April, leaders of the airlines' Newark pilot domicile called on CEO Jeff Smisek to step down. They blame problems in intra-company communications, bad morale, excessive outsourcing, and chronic information technology issues for driving away premium passengers. "Delta and American get the suits, we get the flip-flops and backpacks," they wrote.

Aviation consultant Bob Mann said he wonders whether executives know what's wrong, whether "they have done something and are waiting for a response," or whether "they don't know and are just struggling."

Aviation consultant Mike Boyd, like other experts questioned for this story, said he doesn't see obvious problems. Boyd said mainline service at United's hub in Denver, where he lives, is good. "The only issue I see is their quarterly report," he said. "They're not doing anything stupid, their market planning seems sound and their fleet plan is solid."

The safest conclusion seems to be that United suffers from a number of problems which, collectively, have caused many constituents -- employees and others -- to lose confidence in management. Many but not all.    

Last week, as part of a Wolfe Research airline investor presentation, analyst Hunter Keay hosted a dinner with United Chief Financial Officer John Rainey and other executives. The meeting "started off with difficult questions from investors," Keay wrote in a report issued Friday. "The tone was generally negative (but) management handled it well."

Keay said he left the dinner "increasingly optimistic that the current management team can turn things around." He has an outperform rating on the shares with a $54 price target.

United closed Friday at $43.57, up 15% year to date. During the same period, American shares have risen 55%, Delta shares rose 43%, Southwest (LUV) shares rose 37%, Alaska (ALK) shares rose 34% and JetBlue (JBLU)shares rose 7%.

Regarding United's first-quarter results, Keay said the carrier expected to lose about $300 million, but bad weather widened the loss by $200 million. United's business is more seasonal than its competitors', which "is part of why 1Q looked so bad," Keay said. "No one wants to go to United hubs like Denver or Chicago in February." Strong Florida traffic benefited Delta more than it benefited United, he added.

Additionally, Keay said, American benefits from labor costs that are $1 billion annually lower than United's labor costs. Since the merger, United has signed joint contracts with most labor groups including the largest, the International Association of Machinists. Also, the carrier said Monday it has reached agreement with the Association of Flight Attendants "to begin a collaborative process of faciitated problem-solving" in an effort to reach a joint contract.

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