United Airlines may be the most beefy guy at the party, and the one who always arrives on-time.
But relative to its major peers, United is also the odd-man-out for one glaring reason: it is in the worst financial shape of all of the party attendees.
Even more troublesome is the fact that United doesn’t even appear to be even remotely bothered by this fairly embarassing distinction.
Generally, the first quarter of the fiscal year tends to be the weakest operating period for global airlines. Despite this, Southwest Airlines, JetBlue Airways, Alaska Airlines, Delta Air Lines, and US Airways all posted quarterly profits. American Airlines also posted adjusted profits last week, excluding reorganization and special items expenses.
Conversely, United reported a net loss of $417 million, or $1.26 per share, during this period, isolating itself as the only major airline that incurred a loss among its U.S.-based competitors.
Although niche carrier Hawaiian Air posted a $17.1 million quarterly loss, this figure pales in comparison to United’s, especially given the fact that United continues to slide down a losing streak of poor quarterly performances despite promises of turnarounds from its leadership.
United completed its merger with Continental Airlines well over a year ago, and I think it is now safe to say that the integration was one of the most poorly-executed processes that the airline industry has seen to date, and I stand by the justifications for coming to this conclusion.
First, United blamed the losses on cost creep outpacing revenue growth. What I find obnoxious about this tactic is that for years, United has been promising shareholders that the merger outcome would lead to major cost-saving synergies. The time has come and gone and those benefits have NOT been realized.
Secondly, United does not seem to have a firm grasp on how to steer capacity guidance and convert that practice into generating consistent revenue growth. United has cut consolidated capacity by 4.9% year-over-year, with further plans to reduce this figure by 1.75% in 2013. The capacity cuts from 2012-2013 led to a 11.1% INCREASE in Cost per Available Seat Mile (CASMs) this year, with another 5.5-6% rise expected to occur for the duration of 2013.
Might I add that United’s total revenue grew a tepid 1.4% year-over-year. PRASM was up 5.9%, and yields were up 1.9%. Corporate revenue “recovering” at +4%.
To me that just says, “we have a problem. That problem is going to get bigger.”
Single digit revenue growth, double digit cost growth.
Then, nothing. United moves onto the next topic. No further explanations.
That brings me to the next point of contention: United’s leadership loves to dodge bullets and talk the talk.
Gloating about its operationally record on-time performance and higher customer satisfaction scores, United touted a mainline on-time performance rate of 81.4%.
To me, citing mainline on-time performance rates is extremely misleading. A huge chunk of United’s flights are operated on regional carriers. Excluding this data from the overall percentage can artificially inflate the number to the degree that it does not reflect accurate results.
How can I substantiate this? Every single United Express flight that I took in Q1 2013 arrived late (in addition to plenty of mainline flights that also arrived late, or were cancelled, but I guess I just had bad luck and fell into the 18.6%?).
As for the “improvements” in customer satisfaction indices, United ranked dead last in a survey report measuring the quality of US airline services in 2012, published earlier this month. Of course United’s management is going to mention “improvements” (using whatever questionable scaling metric was applied in this scenario) ’cause when you’re dead last, how is it possible to fall any further? You’re can only go up!
CEO Jeff Smisek was kind enough to make a shout out to his co-workers in spite of these dismal results:
“Our co-workers pulled together in the first quarter to significantly improve our operational performance and customer service despite challenging weather and high load factors, and I want to thank them for their hard work. Although this was a difficult quarter financially, I’m very proud of our team.”-United CEO Jeff Smisek
What I find most surprising of all is the fact that Wall Street isn’t grilling United for not having its act together. A USD $400 million loss in a single quarter is staggering for a carrier that has MAJOR presences in lucrative, important regional markets (New York, San Francisco, Washington, D.C., Los Angeles, Houston, Chicago etc) in addition to a vast global network.
I just don’t get it.
United loves to talk about its product investments. The fleet refurbishments. The 787. The installation of Wi-Fi throughout the fleet.
United also is slipping in $50 increases in change fees and enjoying double-digit growth in ancillary revenues (+14%) and demand for up-sells.
Why, then, are so many puzzle pieces missing?
I’ve written extensively about the post-merger fallout between Continental and United. I’ve assessed all of the moving parts and the need for the dust to settle.
But aside from speaking from an armchair CEO perspective, I’ve given a lot of business to United since moving to Chicago in 2010, enough to witness what is happening, “out on the field.” I’ve attained Star Gold status and invested heavily in United products and merchandising as an elite. While I’ve enjoyed a few perks here and there from upgrades to lounge access, I’m not seeing a lot of of “progress” where front line employees are working together. Morale is simply not one of United’s strong points right now.
I’ve moved through every pre-merger Continental hub (CLE, EWR and IAH) and every pre-merger United hub (ORD, IAD, SFO, LAX and DEN) within the past year, and I can attest to the fact that I feel like I’m flying two separate airlines. There seems to be no sense of belonging, nor ownership, from the Continental side of the airline towards the newly-merged United brand. On the flipside, there also seems to be a resistance to change from the United end of the stick.
It’s been two and a half years since the merger closed, and both airlines were still better of from a financial, operational and marketing perspective pre-October 2010 than they are in April 2013. I think that this merger, if anything, has taught us a few valuable lessons that shouldn’t be underplayed.
First, I think pre-merger Continental was a much simpler airline than pre-merger United, with a much simpler hub structure and IT platform. Labor relations were also much more amicable, and Continental elite fliers were less entitled than United elites (Continental did not even offer a First Class cabin on international routes. Instead, it was among the first US airlines to create a hybridized ‘BusinessFirst cabin that merged both Business and First classes into one).
Contrast this with United, which had a much more complicated hub system (five domestic versus three) along with tons of baggage from two Chapter 11 filings, a worn-out labor force, a more complicated IT platform via Apollo, and a much more entitled elite base. Granted, United trimmed A LOT of fat from its operations between 2000 and 2010, but it was still profitable before the merger.
That said, the Continental leadership was brought over to handle United’s DNA, which is where the complications began. Initially, the differences were fairly neglible until the disastrous PSS cutover, and the red ink has flooded since that dark day on March 3, 2012.
Since then, what seemed like stark differences in culture and operating styles have turned out to create big ripples in the pond. Some notable examples: lack of sufficient training on the sUA side to handle an inferior reservation system. Or, inheriting an IRROPS (irregular operations) policy from one airline (Continental) which is severely customer un-friendly.
But the problem doesn’t start with the employees. The fish stinks from the head. I’m highly disappointed by the explanations that Jeff Smisek and his executive team are providing for the dismal financial performance of this past quarter. I’m seeing very little accountability taken over the mess that United is in, with more talking through the side of the mouth over what to expect over the coming months.
The route maps may have been mashed together finally, but that came with system glitches, a nightmare of fleet swapping practices, horrible on-time performance and the departure of high-revenue paying travelers.
This circles back to scenario of the guys at the party: the fact that American, Delta, US Airways and the rest are making money proves that United lost, and they all have won.
From the perspective of the outside observer looking in, United may appear to be the biggest-looking guy at the party, but we all know who among the attendees is wearing the more expensive clothing.