United Trails American as Merger Benefits Fail to Show

UAL-TRAILS-AMR.png

Henry Binder, a professor emeritus of medicine at Yale University, has been flying United Airlines for 30 years -- not happily, these days.

(Bloomberg) January 21, 2015 - By Michael Sasso

A New Haven, Connecticut, resident, Binder used to fly routinely from the Hartford airport to Washington’s Dulles International. Since merging with Continental Airlines, United has cut routes into Dulles, forcing him to drive more than two hours to Newark’s Liberty International.

Other inconveniences include United’s lack of a first-class lounge at Newark, the occasional malfunctioning seat and even the lack of a butter plate during meals.

“They’re so interested in improving their bottom line and having their stock price go up, more than improving their service,” said Binder, 77.

Binder is among a legion of customers unhappy with United’s execution more than four years into the merger with Continental Airlines. It ranked next to last in J.D. Power’s 2014 airline satisfaction ranking, is No. 1 among major airlines in bumping passengers involuntarily and ranked only eighth or ninth out of 14 carriers in on-time arrivals through most of last year.

For investors, the deal’s benefits have been as slow to appear as some tardy United jets. Costs still exceed the industry average. American Airlines’ profit through five quarters is expected to exceed the profit United has made in the four years since its tie-up with Continental. That includes United’s fourth-quarter results, due to be released on Jan. 22, which are projected to show earnings per share of $1.22, up 56 percent from a year earlier.

Power Curve

“I would say that they are further behind the power curve than Delta or Southwest,” said Andrew Meister, an analyst at Thrivent Financial, whose United holdings of about 134,000 shares are held in index funds and are less than a 20th of the firm’s stake in Delta.

United executives said in interviews that the travails of the merger are largely behind the combined company.

“It truly feels like we’re emerging from this metaphorical conference room, where we’ve been stuck in a merger,” said Brian Znotins, who plots United’s schedule as vice president of network.

Some analysts agree United is turning things around by cutting costs and adding more fuel-efficient planes on its regional flights. The question among some investors is how much United’s improvement stems from its own efforts or from the low fuel prices and strong ridership that are lifting the entire industry.

United’s marriage to Continental has been racked with coordination glitches since its completion in October 2010. In January 2014, in one notable example, the airline lost track of which pilots were working certain flights after its crew-scheduling computer system fouled up.

Customer Service

Such snafus contributed to profits that were just 40 percent of Delta’s in 2012 and 2013, adjusted for one-time items. Things got worse in 2014’s first quarter, when United lost $489 million in a wicked winter season filled with cancellations. United is No. 4 in the U.S. industry by market value, even though it’s the world’s second-biggest airline based on passenger traffic.

While United’s customer service ratings are improving, so are those at its rivals, said Rick Garlick, J.D. Power’s global practice lead for travel and hospitality. Last year United’s customer-satisfaction score jumped by 17 points -- while the average airline’s rose by 20.

“There are some flights that don’t even have Gogo Wi-Fi yet,” Garlick said. “I think United is starting to change. The problem is they are laggards.”

Wi-Fi, Sandwiches

By the end of this year, all United planes will have Wi-Fi, Chief Revenue Officer Jim Compton said. Food and drink service in premium cabins got an upgrade in the fall, with Prosecco sparkling wines and new salads and sandwiches, according to Megan McCarthy, a spokeswoman. United is bringing back bread plates to domestic premium-cabin trays in February.

Labor relations remain a flash point. Efficiency suffers because attendants from the two predecessor airlines can’t work on the same jet, said Sara Nelson, president of the Association of Flight Attendants, which represents 21,000 United employees.

On a recent flight to Glasgow, Scotland, from New Jersey’s Newark airport, attendants were quick to identify themselves as a Continental crew -- a sign that employees don’t yet see each other as a single team, said aviation consultant Jay Sorensen.

“There’s the potential there, but the leadership style just does not have credibility with their front-line employees,” said Sorensen, a former Midwest Airlines marketing executive who now runs IdeaWorksCompany in Shorewood, Wisconsin. “This is a giant company that has nothing structurally wrong with it, so as the airline industry does better, it will do better as well.”

Pilot Friction

Even the negotiation of a new joint contract for pilots in December 2012 failed to extinguish friction from the two former work groups.

United pilots and company management recently squared off over a union grievance over crew meals. They were accustomed to getting the same treatment as first-class passengers, with food served on china and cooked in foil, while Continental pilots weren’t always fed. Management changed the system post-merger to meals heated and served in plastic, said Jay Heppner, chairman of the United pilots union.

“It seems petty, but regardless of whether it’s petty or not, it’s in our contract,” Heppner said. “We negotiated for it. We paid something for that.”

Compton said United still has work to do in improving an on-time arrival rate that ranks in the middle of the U.S. pack. It’s reviewing its hubs -- Cleveland’s demotion was announced last year -- and trying to reach labor deals with attendants and mechanics, he said.

Regional Jets

It has shaved off $500 million in annual costs, including layoffs, hoping to eventually cut $2 billion, Chief Financial Officer John Rainey said in late September. United’s senior-management ranks also turned over in 2014, with the departures of chief operating officer Pete McDonald and chief information officer Bob Edwards.

It is dumping 130 regional jets in the 50-seat range in favor of more comfortable, fuel-efficient 76-seat planes. Those smaller jets had contributed to United’s industry-high costs.

The moves helped United earn $919 million and $1.1 billion, respectively, in 2014’s second and third quarters, excluding extraordinary items. Its July announcement that it will buy back $1 billion in shares within three years surprised investors.

Some analysts now are giving United a second look. Of 18 recommendations on the stock, 13 analysts rate it a buy.

Stock Recommendations

Oil’s decline is helping, but so, too, are United’s efforts to control costs and stop losing market share in places like New York, said David Fintzen, a Barclays Plc analyst who raised his rating a rare two levels, to “overweight” from “underweight,” in December.

The shares’ recent rally left them up 68 percent since October 13, when airline shares hit their lows amid the Ebola scare. That lags only Hawaiian Holdings Inc., American and SkyWest Inc. in a Bloomberg index of 11 U.S. airline stocks.

Analysts project United to earn $3.65 billion in profits this year, adjusted for one-time items, according to the average of 14 estimates compiled by Bloomberg. That would more than triple its adjusted profits from two years earlier.

Some of the turnaround can be attributed to favorable economic conditions, said Helane Becker, a Cowen & Co. analyst. “But in every one of their hubs they have significant competition, and if they weren’t doing a good job, they would be losing market share, and they’re not,” she said.

In asking for patience, Compton invoked the name of Gordon Bethune, the salty-tongued former chief of Continental, who revived that airline based on superior customer service after two bankruptcies.

“I worked for Gordon Bethune and his worst-to-first story doesn’t happen overnight,” Compton said.

To contact the reporter on this story: Michael Sasso in Atlanta at msasso9@bloomberg.net

To contact the editors responsible for this story: Edward Dufner at edufner@bloomberg.net Larry Reibstein, Molly Schuetz

®2015 BLOOMBERG L.P. ALL RIGHTS RESERVED.

News Desk

Latest News

See All »

Media Releases

See All »

Industry News

See All »

    Flight Attendants on Google News

    Union Plus Benefits

    union-plus.jpgUnion Plus Benefits for AFA-CWA Members!
    AFA-CWA members are automatically eligible for the following Union Plus benefits and discounts.


    More benefits »