United Continental (NYSE:UAL) is going through a rough patch. The airline posted a net loss of $103 million in the nine months ended September 30, 2012.  In contrast, other major U.S. airlines including Delta (NYSE:DAL), US Airways (NYSE:LCC), Alaska (NYSE:ALK), Southwest (NYSE:LUV) and JetBlue (NASDAQ:JBLU) posted handsome profits for the same period. Its closest competitor Delta posted net income of $1.03 billion in the first three quarters of 2012.  So, what exactly is ailing United?
The carrier is going through a very crucial phase of integration with Continental, which apart from impacting its bottom-line by way of integration costs is also severely impacting its operational performance. In March, United moved to a common IT system platform for both airlines, resulting in a single booking website. However, the system has malfunctioned three times since leading to flight delays and several cancellations in each instance. Consequently the carrier’s on-time performance has suffered. This has hurt its credibility among passengers which in turn has impacted its growth in overall passenger traffic and revenue.
We currently have a stock price estimate of $21.31 for the airline, approximately 5% above its current market price.
Repeated malfunctioning of IT systems erode United’s credibility among customers
In two separate incidences in March and June, United’s IT systems malfunctioned leading to delays and cancellations. A fortnight ago, just ahead of Thanksgiving holiday which is one of the busiest travel periods in the domestic U.S. market, computer systems of the carrier again developed glitches. This time around there were 257 flights delayed and 10 flights cancelled.  Flight cancellations due to inclement weather conditions are understandable, however flight cancellations on clear sky days due to the malfunctioning of computers are absolutely not. Additionally, such repeated incidents erode the reliability of a carrier among passengers.
United has also witnessed the highest number of passenger complaints among the six largest U.S. airlines in 2012. Around 3,414 complaints were registered against the airline in the first nine months of 2012, which translated to 4.81 complaints per 100,000 passenger enplanements. The corresponding figure for Delta, its closest rival, was 0.82. Even American Airlines, which is in bankruptcy court, had only 1.73 complaints per 100,000 enplanements.  This surely indicates that the airline’s service standards have deteriorated.
Additionally, on-time performance which is a critical parameter to evaluate operational performance was also significantly lower for United compared to peers. United recorded on-time arrival rates of approximately 80%, 76% and 72% in Q1, Q2 and Q3, respectively.    In comparison, Delta’s on-time arrival rates for Q1, Q2 and Q3 were considerably higher at 87%, 88% and 85%, respectively. 
All in all, due to repeated computer system breakdowns and lower on-time arrival rates, United’s credibility among passengers has declined. This has in turn impacted its top-line growth. United’s total revenues in the nine months ended September 30, 2012 increased a mere 1% on a year-over-year basis.  While those for Delta increased 5% y-o-y in the same period. 
United, on its part, has said that it has resolved all issues related to IT systems, but the carrier will have to make sure that the ongoing merger with Continental does not hamper its operational performance and service standards. Only then will it be able to extract the anticipated economies of scale from the merger and return on the path of growth.Notes:
- United Announces Third-Quarter 2012 Profit, October 25 2012, www.unitedcontinentalholdings [↩] [↩]
- Delta Announces September Quarter Profit, October 24 2012, www.delta.com [↩] [↩]
- United’s difficult days, November 19 2012, www.economist.com [↩]
- United looks to bid 2012 adieu as integration challenges start to stabilise, November 16 2012, www.centreforaviation.com [↩]
- United Announces First-Quarter 2012 Results, April 26 2012, www.unitedcontinentalholdings.com [↩]
- United Announces Second-Quarter 2012 Results, July 26 2012, www.unitedcontinentalholdings.com [↩]
- United Announces Third-Quarter 2012 Results, October 25 2012, www.unitedcontinentalholdings.com [↩]
- Monthly traffic reports, www.delta.com [↩]