Woe is United, but why? Four theories

The persistent financial letdowns have some analysts wondering if the airline has some sort of structural defect and if the merger of United and Continental airlines, three years on, is gelling.
Bloomberg photo

When it comes to United Airlines' recent financial performance, there's pretty much only one point of consensus: It's been lousy. Even the company owns up to it.

"We are not pleased with our first-quarter financial results," conceded United Continental Holdings Inc.'s chief financial officer, John Rainey, in an April 24 statement announcing the Chicago carrier's loss of $609 million in the period.

United was the only major U.S. carrier to lose money in the first quarter.

The persistent financial letdowns have some analysts wondering if the airline has some sort of structural defect and if the merger of United and Continental airlines, three years on, is gelling. “The first thing you have to do is stop the bleeding,” said George Hamlin, president of Hamlin Transportation Consulting in Fairfax, Virginia. “Now, where it's taking place, it's not completely obvious yet.”

United stock has dropped 13 percent since the company's first-quarter earnings call. That day, United shares took their biggest nosedive since October 2011, falling 9.8 percent to $41.53 at the close. By yesterday, shares had sunk even lower, closing at $39.90. Investors are openly expressing exasperation.

“Everyone gave them the benefit of the doubt. It was their game to lose and they've done it spectacularly,” said Vicki Bryan, a senior analyst at New York-based Gimme Credit LLC. “This is not computer systems anymore. This is not putting the right people in place. This is too many layers,” she added.

So why is United struggling to gain altitude? Different analysts have different theories, but a few themes have emerged.

PRICING THE PRODUCT

The past two quarters, United has cited botched revenue management — taking too many early bookings and not selling enough higher-priced seats closer to the date of the flights — as at least one source of its problems. This process is managed by computer programs that can forecast what customers are willing to spend, said Robert Mann, a former American Airlines executive who now runs aviation consultancy R.W. Mann & Co. in Port Washington, New York.

Mr. Mann contends United Continental's woes are rooted in the fact that it cast off United's revenue management systems in favor of Continental's, which were suited to a smaller airline. “If you correlate the network performance before and after the shift, I think there is a pretty evident underperformance,” Mr. Mann said. “Reverting to United's former systems and processes would go a long way to erasing what has been an underperformance on unit revenue.”

ROUTE AND HUB ISSUES

Many analysts, including JPMorgan Chase & Co.'s Jamie Baker and Cowen & Co.'s Helane Becker, question United's control over its existing hubs and whether the airline should rethink its route structure as competition heats up among low-cost domestic carriers such as Southwest Airlines and Spirit Airlines. “They should focus on the markets where they have a dominant local community and lots of corporate travelers,” Ms. Becker said.

“UAL is just too big,” analyst Hunter Keay of Wolfe Research LLC in New York wrote after United's disappointing first-quarter results on April 24. He cited too many routes — 58 percent and 65 percent more than Delta Air Lines and American Airlines, respectively. He also cited too many hubs, specifically calling out Denver and Los Angeles as “poor hubs.” The airline recently put its Cleveland hub on the chopping block.


United Continental CEO Jeff Smisek

Jeff Smisek, United's CEO, dismisses analysts' claims that the airline has structural problems. “It's a lot of basic blocking and tackling, getting our operational integrity humming and we're clearly making progress there,” he said during the earnings call.

Ms. Becker, however, is not convinced. “The basic blocking and tackling you're talking about should have been done. . . .Frankly, if the people in charge can't do it, there should be new people in charge.”

CHINA, CHINA, CHINA

Quarter after quarter, Chinese airlines seem to have come out of nowhere to steal marketshare on lucrative flights between here and there. Though United has been a longtime leader in trans-Pacific travel, the company blames increased competition in this booming market in large part for its losses. Unit revenue in the first quarter of 2014 declined 6.3 percent in the Pacific compared with a 3.4 percent decline for trans-Atlantic revenue and 1.7 percent for Latin America, Bloomberg reported.

“There is no doubt that competitive pressures from the U.S. to Asia, particularly to China, where we are the largest airline by far, have pressured our unit revenue,” Mr. Smisek said during the call.

“I think it's a harbinger for things to come. I think the Pacific is the tip of the iceberg,” Cowen's Ms. Becker said, citing the increased capacity from Middle East carriers.

THE PEOPLE AT THE TOP

“I can't think of anything fundamentally wrong with United," said Joe Schwieterman, a former strategic planning specialist at United who now heads the Chaddick Institute for Metropolitan Development at DePaul University. "They have a hub system that is to die for. It's the envy of the industry,” he said. And yet, the integration of the two airlines remains challenging. "They have not been able to bring out the best of both worlds as much as they would hope."

Ms. Bryan of Gimme Credit points the finger squarely at the executives running the company. “They have a gold mine with this network. Everyone gave them reams and reams of rope to get this together because this was going to be wonderful,” she said. “When you have what should be wonderful and you squander it, that's management.”

Foremost, Ms. Bryan criticizes the airline doling out sizable executive compensation packages while laying off employees and dinging customers with baggage fees and expensive dining options. On the April earnings call, United said it expects $3 billion of ancillary revenue in 2014, which represents 8 percent growth year-over-year.

“They are not getting the corporate and overseas traveler. They are not winning that marketshare back because they are not valuing the flying public's experience,” Ms. Bryan said. Corporate bookings at United rose only 2 percent in the first quarter, far behind Delta's 6 percent increase.

http://www.chicagobusiness.com/artic...-four-theories

 

-- "Everyone gave them the benefit of the doubt. It was their game to lose and they've done it spectacularly,”

-- "Mr. Mann contends United Continental's woes are rooted in the fact that it cast off United's revenue management systems in favor of Continental's, which were suited to a smaller airline."

-- Ms. Becker, however, is not convinced. “The basic blocking and tackling you're talking about should have been done. . . .Frankly, if the people in charge can't do it, there should be new people in charge.”

-- “They have a gold mine with this network. Everyone gave them reams and reams of rope to get this together because this was going to be wonderful,” she said. “When you have what should be wonderful and you squander it, that's management.”

 

Depressing. As is mentioned as a "harbinger of things to come", they are just getting going in the Middle East with 100s of billions worth of widebody orders still to come.

 

Competition is not even the problem right now. Jeff continues to destroy the merged airline by maintaining the merger of equals mentality from within. It hasn't worked and time is running out. Jeff needs to go.

You're right about the MidEast onslaught. If it/we get to the point of seeing it, it won't be as a competitor. More likely watching the final nail for UAL.

 

As compared to what, SFO and ORD?

 

 

"Reams of rope"? Reams of paper? Yards of rope? The straw that broke the camels back?

 

I think she was saying they were given enough rope to hang themselves with.

 

"DEN doesn't really serve a purpose. Hubs in the middle of the country aren't needed anymore, aircraft have transcon range nowadays" Or something like that........

ORD/IAH don't count as middle of the country I guess.

 

Keep an eye on what AMR does in ORD.