United’s Reliability And Customer Experience Are Key To Better 2013 Results

by Trefis Team
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UAL
United Continental Holdings
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    Quick Take

  • In 2012, United’s passenger traffic and yield suffered due to poor on-time performance, which resulted from issues related to the IT systems integration between United and Continental
  • An improvement in United’s on-time arrival performance and customer experience is necessary for it to regain the passenger traffic it lost in 2012
  • So far in 2013, the integrated IT system of United and Continental has worked well, which has improved the on-time performance
  • The carrier has also undertaken a slew of measures to improve its customer service standards, which will help it raise its share of corporate travelers

In 2012, United (NYSE:UAL) went through a tough period of integration with Continental that saw several system failures as well as flight delays and cancellations. These events significantly lowered the carrier’s on-time performance and customer service levels, which negatively impacted its passenger traffic. United’s share of corporate travelers also declined significantly in 2012, reflected from a fall in its revenue premium (United’s passenger revenue per unit its flying capacity – other airlines’ passenger revenue per unit their flying capacity). Consequently, lower passenger traffic and revenue premium contributed to the carrier’s booking a loss of $723 million in 2012, a year in which all other major U.S. airlines reported handsome profits.

In 2013, operational reliability in terms of on-time arrival and departure as well as better customer service will be key to recovery in United’s profits. We currently have a stock price estimate of $32 for the carrier, marginally above its current market price.

See our complete analysis of United here

Operational Reliability Will Aid Growth In Passenger Traffic

United’s on-time arrival rates declined to a low of 63% in July last year due to flight cancellations and delays resulting from issues related to IT systems’ integration between United and Continental. [1] However, post-integration the system has worked well and passengers haven’t faced delays and cancellations like 2012. As a result, United’s on-time performance has risen steadily to above 80% in February 2013. [1] If the carrier maintains these healthy on-time arrival rates going forward, then the damage done last year to its operational reliability will be repaired. This will help it in growing passenger traffic in 2013.

Improved Customer Service Will Bring Back Corporate Travelers

United is also focusing on improving its customer experience. To achieve this, it is investing in customer service training for its front-line employees and in technologies like the development of mobile apps which allow customers to sign up for priority boarding or check-in with ease. The carrier is also installing satellite based WiFi on its aircraft that will allow passengers to access email, browse, stream videos and stay in touch online during long international flights.

Currently, most other airlines use a network of ground stations to provide in-flight WiFi services, but this technology does not work when the aircraft is over water, away from a ground station. Satellite WiFi service is particularly a good proposition for business travelers as it helps them stay connected during long duration flights. This service will accelerate return of corporate travelers to United and also generate ancillary revenue. Currently, United charges $6.99 and $10.99 per flight for standard and accelerated on board Internet access, respectively. [1] The carrier is also installing flat-bed seats in premium class cabin for all its international wide body aircraft.

Overall, United is focused on providing an improved, hassle-free booking, boarding and flying experience to its customers. These efforts seem to be paying off, as customer satisfaction score (% of customers satisfied – % of customers dissatisfied) for the carrier improved to around 30 in January 2013, from under 10 in July 2012. [1]

Corporate travelers who shifted to other carriers last year also seem to be coming back as the carrier’s revenue premium (United’s passenger revenue per unit its flying capacity – other airlines’ passenger revenue per unit their flying capacity) nearly broke in to positive territory in January 2013, recovering from -5 percentage points in the second quarter of 2012. [1] Corporate travelers typically travel business class or book last minute flights, hence, they contribute higher revenues per seat (which raises revenue premium) compared to other passenger segments.

If United can maintain its gains in on-time performance and customer satisfaction scores made during the past 5-6 months, then a greater number of people especially corporate flyers will opt for it, boosting its profits.

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Notes:
  1. United’s JPMorgan Aviation, Transportation & Defense Presentation, March 4 2013, www.unitedcontinentalholdings.com [] [] [] [] []
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