In 1985, United Airlines made one of the best deals in the history of commercial aviation, acquiring Pan American World Airways' Pacific routes for $750 million. The deal included 11 Boeing 747 aircraft, adding to the 747 fleet United began to build in 1970.

It is safe to say that at the time of the deal United was the leading U.S. airline.

Today, United Continental Holdings Inc. (UAL) remains the leading U.S. airline in the Pacific. But in many other respects, including closely watched metrics such as profit margin and unit revenue, it trails its principal competitors, American Airlines Group Inc. (AAL) and Delta Air Lines Inc. (DAL)

On Tuesday, Nov. 7,  United operated its final Boeing 747 flight between San Francisco and Honolulu, celebrating with a 1970s-themed party that recalled the glory days.

It was not a good day in terms of share price performance. Year-to-date through Tuesday, United shares have declined 19%. American shares have fallen 0.5%, Delta shares gained 1% and Southwest Airlines Co. (LUV) shares risen 8%. The S&P 500 has jumped 16% so far in 2017.

In some ways, United is still digging out from management mistakes over the past 15 years.

United entered bankruptcy protection in 2002 and sat there for 38 months, looking for a merger partner it never found. It emerged in 2006 and finally in 2010 it engaged Continental.

Not only did United merge later than it had envisioned, but also the board handed over merger implementation to a Continental management team that in retrospect wasn't up to the task.

In 2015, that team was ousted and Oscar Munoz took over. In August 2016, Munoz hired Scott Kirby to be president and Andrew Levy to be chief financial officer.

While the arrival of the new team, particularly Kirby, brought high expectations, the earnings call on Oct. 19 served as a wake-up call as United shares plummeted 12%, their biggest one-day percentage decline in eight years.

During the call, management "highlighted several cost challenges for 2018 without providing underlying details such as capacity growth," wrote Deutsche Bank analyst Mike Linenberg. "The market dislikes uncertain situations."

Part of the problem is that United has sought to restore its former luster partially by restoring hub capacity that was lost to earlier management's cost-cutting obsessions, spurred on by Wall Street analysts.

"We built everything around focusing on international, which we do really well,"  Kirby said at United investor day a year ago, on Nov. 15, 2016. "But we let the domestic slide. {Today} United uniquely has less exposure to {domestic} markets than our competitors."

In order to restore dominance or at least equality at its hubs, United must build its domestic capacity. That feeds the perception that domestic capacity is growing too fast.

In a recent report, Barclays analyst Brendan Oglenski wrote that one of the biggest questions airline shareholders face this quarter is, "When will the pain stop for shareholders of United?

"For United, we are concerned that a strategy of elevated network expansion is set to repeat again in 2018, given elevated growth levels in current schedules for the first quarter," Oglenski wrote.

But you cannot have a great international route system if you cannot feed your international flights with domestic passengers.

"The plan that United provided at its 2016 Investor Day to close the margin gap with Delta has created expectations that are incredibly high to the point of being unrealistic," wrote Stifel analyst Joseph DeNardi, in a recent report.

"The combination of lower market shares in its hubs, more exposure to [low cost carriers] and more competition on its regional feed traffic are significant structural headwinds that, in all likelihood, will prevent both United and American from ever closing the margin gap [with Delta]," he wrote.

In the current quarter, Delta foresees a unit revenue gain between 2% and 4% with margin between 11% and 13%. American sees unit revenue rising 2.5% to 4.5%, with a margin between 4.5% and 6.5%. United sees a unit revenue decline between minus 1% and minus 3%, with margin between 3% and 5%.

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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