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

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.


A lingering problem is China, where United is by far the biggest U.S. carrier. It has 7% of capacity in China/Hong Kong markets, while Delta and American each have about 2%, according to Deutsche Bank analyst Mike Linenberg.

Unfortunately for United, overall capacity between the U.S. and China has increased more than 30% since 2012. In the first quarter, revenue on United's Pacific routes declined 5% to $1.1 billion and Pacific passenger revenue per available seat mile fell 6.3%.

"There's no doubt that competitive capacity pressures from the U.S. to Asia, particularly to China, where we are the largest U.S. airline by far, have ... pressured our unit revenue," Smisek said, responding to a reporter's question during the first-quarter earnings call. "That said, we make good money in Asia today, even with that pressure."

Mann said a big problem for United involves a portion of its computerized revenue management system. On earnings calls the past two quarters, management has cited problems with the system, which has two main components. One controls pricing. Second is a revenue integrity system, "a back end system that controls quality - that makes sure reservations are not duplicates, cancels those that are, and works quickly," Mann said.

After the Continental merger, United maintained its own primary revenue management system but sought to adapt Continental's revenue integrity system. To do that, "United abandoned a known-to-be-working, high functioning system," Mann said, undermining the overall integrity of its revenue management system. "The worst thing you can do is to bet on revenue that doesn't show up," he said.

Online travel columnist Joe Brancatelli said United's service level has deteriorated, angering passengers. "I've been writing about United's problems since two months before the computer meltdown in 2012," he said. "There are a million things that go wrong. I haven't seen this level of hate for a carrier since the worst moments of Northwest in the late 1990s, and the people they have most offended are the elite travelers."

In a letter to pilots on May 9, following a closed-door meeting of United pilot leaders, Jay Hepner, chairman of the United chapter of the Air Line Pilots Association, said pilots have "developed a strategic plan to make our airline better." A copy of the letter was obtained by TheStreet.

Elements of the plan include executive management "being accountable for the airline's financial health and infrastructure; recognizing the value of our assets and employees; making ALPA part of the collective solution in developing the infrastructure and processes; honoring their commitments to our employees, passengers, and shareholders and resolving the major shortcomings that are bleeding this company," Hepner wrote.

Few people remember that in 2009 and again in 2010, United led all of the legacy network carriers in on-time performance. In both years, it was Delta that led the industry -- by a wide margin -- in the number of complaints per 100,000 passengers. Delta also ranked 15th among 17 carriers in on-time performance in 2010.

But in 2013, Delta was third among 16 ranked carriers in on-time performance, while United was ninth. In number of complaints per 100,000 passengers, Delta was second of 16 while United was 14th.

It's a sign that airline management teams do have the capability to turn things around. But United's management may be running out of time.

Written by Ted Reed in Charlotte, N.C.

To contact this writer, click here.

Follow @tedreednc

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