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Hear this AA-US Airways merger boosters: United Continental’s integration woes drags earnings

Jul 26, 2012 4:07 pm

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Forget about merging cultures, they couldn’t merge non-cultural items like reservation systems. What hope do we hold out for AA-US Airways if it happens?

— Rafat Ali

Latest Report: The Future of the Aircraft Cabin

United Continental Holdings Inc’s quarterly profit slid 37 percent, hit by higher fuel bills and lingering costs from its messy and long merger of United and Continental airlines.

United’s shares, which have risen about 8 percent this year, fell as much as 7 percent to $18.90 on Thursday on the New York Stock Exchange.

Chief Executive Jeff Smisek said the company’s services were affected by the shift to a single passenger service system and hundreds of other new procedures.

“Those changes were in a large part responsible for the degradation in our operating performance,” Smisek said on a conference call for analysts and media.

United bought Continental in a $3.17 billion all-stock deal in 2010, creating the world’s largest air carrier, amid volatile fuel prices and overcapacity in the industry.

The merged company, however, has struggled to integrate operations smoothly, even as rivals Delta Air Lines Incand US Airways Groupreport better than expected earnings.

United recorded a charge of $206 million in the second quarter due to systems integration and training, severance packages for voluntary retirements and employee relocation.

S&P Capital IQ downgraded the stock to “hold” from “buy,” saying the messy merger meant the airline was lagging rivals.

“While we think long term the merger will bring great benefits, we have less confidence in management’s ability to manage the integration in the near term,” S&P analyst Jim Corridore said in a note to investors.

United had said it would fix problems in its reservation system by June but Ray Neidl, an analyst with Maxim Group, said September now looked more likely.

“We have always said that mergers take twice as long and costs twice as much to implement,” said Helane Becker, an analyst with Dahlman Rose & Co, adding that United will continue to incur integration costs till the middle of next year.

DISAPPOINTING RESULTS

United’s net profit fell 37 percent to $339 million. Excluding charges, it earned $1.41 per share, well below analysts’ expectations of $1.66 per share, according to Thomson Reuters I/B/E/S.

Operating revenue rose 1 percent to $9.94 billion. Fuel costs rose 6 percent to $3.41 billion.

Analysts had expected revenue of $10.03 billion.

The second quarter is usually considered a strong one for airlines as summer season spurs travel demand.

Delta Air Lines and US Airways Group topped analysts’ profit estimates on Wednesday, but US Air signaled that corporate travelers could be growing more cautious, sparking concern about the outlook for the industry.

There are concerns that demand could slow after the U.S. Labor Day holiday in early September — the end of the summer season.

United said demand was relatively stable and bookings for the next six weeks were strong.

Its advanced seat bookings – measured as a percentage of available seats that are sold – for the next six weeks for its mainline domestic services was up 2.7 points from a year ago while international was up 1.5 points, the company said in a regulatory filing.

(Editing by Supriya Kurane in Bangalore)

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