A great stock price has to be seen as a fluke when passengers are abandoning the airline as fast as they can.
United and Continental closed their merger in 2010 and created what was then the world’s largest airline.
Fifty-seven months later, executives are still working to integrate United Continental Holdings into a single company—and struggling with some high-profile operational and customer service problems.
Over the past six weeks, United suffered two technology glitches that grounded flights, including a two-hour network outage on July 8 that halted flights worldwide and was traced to a faulty router. Those incidents followed other technology mishaps in 2012 and 2014, which snarled reservations and crew- schedule systems.
United upgraded the Chicago data center housing all its IT infrastructure, spokeswoman Megan McCarthy said, refuting notions that the airline has pinched pennies on technology. But there has been turnover in the carrier’s top tech job: Linda Jojo became chief information officer in September, the third executive in that role since the 2010 merger.
The July 8 router problem “seems like a garden-variety networking issue” that should not have become a major problem, said Jeff Wilson, an analyst with networking industry research firm IHS Infonetics, given the abundance of monitoring tools most large companies employ. Mergers like the United-Continental deal create problems in melding apps, servers, and networks, he said, but the merger dates to 2010. “That’s plenty of time to get that stuff worked out,” Wilson said. United has “a number of redundancies and backups throughout its system,” McCarthy said.
Passengers have noticed glitches, even when the technology isn’t breaking down. “I flew United for work, but I avoid it now if I can,” said Todd Anson, a San Diego attorney who flew to LaGuardia Airport earlier this month to help his son find a new apartment. “I find that 80 percent of the time I fly United, my flight is delayed.”
Andrew Coggins Jr., a management professor at Pace University in New York, calls himself a United loyalist because the airline has gone to great lengths to accommodate his family, including after a death in Hawaii that required flight arrangements at very short notice. But even Coggins acknowledged “adventures” he had while flying the friendly skies, such as a three-day ordeal traveling from Roanoke, Va., to Hong Kong following a string of delays and cancellations. “After having so many adventures, I just kind of go with the flow,” said Coggins, who has flown more than a million miles on United. “I only really get upset with them when it’s something they could’ve avoided.”
Regardless of how brief the outages were, or how mundane their causes, the IT problems reinforced the image of an airline exposed to disparate technology platforms, the strains of a $2 billion cost-cutting effort, and displeased employees, some of whom still work under separate contracts.
United is trying to complete its merger amid competition from three large, powerful rivals: Delta is wowing the industry with its schedule reliability and potent earnings; Southwest is rapidly expanding abroad, targeting a key United hub in Houston; and American is now the world’s largest carrier and absorbing US Airways, with most of the heavy merger work expected to be completed by early 2016.
United is also aiming to finish its integration amid a major cost-cutting effort called Project Quality, which is targeting $2 billion in annual savings as the company also tries to boost revenue. That has led to tensions since employees sometimes find they “don’t have the money and equipment to do the job,” said Vicki Bryan, a senior bond analyst at Gimme Credit. She downgraded the airline to an underperform rating on July 10, arguing that operational and customer service problems are eroding United’s revenue growth and that management has missed opportunities to exploit a route network that was superior to those at American and Delta.
“In many ways it’s felt like we’ve been managing a merger and not an airline,” United Chief Executive Officer Jeff Smisek said in late 2013 when the company announced the initiative as part of an effort to begin turning in higher profits.
Even before the high-profile tech woes, Chicago-based United was suffering from schedule reliability issues. In June, about 30 percent of United’s flights were delayed at least 15 minutes, a performance that ranked it behind all other U.S. carriers save for ultralow-cost operators Spirit Airlines, Allegiant Travel, and Frontier, according to data tracker FlightStats.com. Delta, by comparison, saw 19.6 percent of its flights delayed, while Alaska Airlines was at 12.8 percent.
United says its troubles this summer are isolated incidents—one-off computer glitches and stormy weather—and not systemic problems. Thunderstorms in June at its Chicago, Newark, and Houston hubs disproportionately affected its system reliability, with weather bedeviling the hubs on 25 of June’s 30 days, United told employees in a recent newsletter. Maintenance problems in Newark also plagued United’s long-haul international fleet, contributing to the delays. Only 42.2 percent of United’s flights left on time in June, far short of the company’s goal for 55 percent on-time departures. United reduced its flight schedule in July to free aircraft for use as spares when needed, United’s McCarthy said, and that has alleviated strains on the operation.
“We did not meet our on-time goals under the performance bonus program, our employees were challenged to deliver the kind of service they want to provide and we did not meet the expectations of our customers,” United said in its employee newsletter.
United has also slipped in customer-satisfaction rankings, dropping to last place among North American airlines in J.D. Power’s 2015 study and to worst among the major airlines in the latest Airline Quality Rating, compiled by Wichita State and Embry-Riddle Aeronautical University. United finished ahead of only three regional carriers.
Those kind of results also show a risk for United in losing corporate contracts and other lucrative business. Delta Air Lines CEO Richard Anderson said this week that his company is seeing “huge share and revenue shifts” to Delta because of its service reliability as travelers migrate from other carriers. In the second quarter, Delta tallied 43 days without a flight cancellation in its mainline operation, which excludes its regional carriers. Anderson credited the tight operation to “a myriad of investments” in technology, planning tools, and schedule assembly. “And in the end, there’s no substitute for the power and the know-how of the employees,” he said on July 15 on a quarterly earnings call.
United executives—like most Wall Street equity analysts who follow the company—view the carrier as a successful financial turnaround, with four quarters of profits and another one expected to be reported later this month. The airline has also upgraded meals, in-flight entertainment, and Wi-Fi service. While 2015 has been rocky for all airline stocks, over a full year United shares have gained 24 percent, compared with a 16 percent rise in the broader Bloomberg U.S. Airlines index.
“You can’t argue with the stock price performance,” says Helane Becker, an analyst with Cowen & Co., who has an outperform rating on UAL shares. That’s one reason that, no matter how long the merger integration takes or how much bad press United suffers over flight delays and customer service, Smisek’s team is likely secure, she said. “As a board member, what do you do?” Becker asks. “How do you replace management in an environment where the stock is rising?”
Beyond technology, another major hitch in the integration has been an inability to reach contracts with flight attendants and mechanics, who represent more than one-third of United’s 81,000-member workforce. The airline has held talks with unions representing both groups this month, though no deals appear imminent. The Association of Flight Attendants, which represents 24,000 United flight attendants, picketed in 19 cities on Thursday to protest the slow pace of talks. Likewise, United’s 9,000 mechanics “are losing patience as the company drags its feet” on a contract, the International Brotherhood of Teamsters warned in June. United has reduced head count in recent years, from almost 85,000 workers in 2012 to less than 82,000 now.
“I’m hard-pressed to think of another management team that has squandered as much goodwill as was showered on these guys at the beginning of this merger,” Bryan, the bond analyst, said in an interview. “It looked like the dream team was taking on a network made in heaven, so we are understandably very much holding these guys accountable.” The sharp decline in jet-fuel prices has masked United’s financial weaknesses, she argues, and “the quality of the profits” is not the same as its rivals’.
“Why is United not doing better than it was in 2011 on many key points?” Bryan asked. “This is not a newly merged venture; we’re well into it. We’re two years past the point of where it should be, and we’re still figuring this out? Really?”
Aside from whatever grousing the traveling public heaps on United, its most frequent customer remains pleased by the airline. “Most of the on-time thing is weather-related and you can’t blame United for Mother Nature,” said Tom Stuker, a Nutley (N.J.) sales consultant who recently topped 16.5 million miles on United. When Stuker reached 10 million miles, in the summer of 2011, CEO Smisek presented him with a titanium card marking his loyalty to the airline, which also named a Boeing 747 in his honor. Stuker, it should be noted, sits in the first row on about 99.9 percent of his flights. “It’s probably where I ought to get my mail,” he quipped, en route to the airport for a flight to London.
—With Peter Burrows and Peter Reford
This article was written by Justin Bachman and Michael Sasso from Bloomberg and was legally licensed through the NewsCred publisher network.
Photo credit: United Airlines CEO Jeff Smisek accepts a a model of Boeing's new 737 Max 9 from Boeing Commercial Airplanes CEO Ray Conner, left, during a news conference, in Chicago. M. Spencer Green / Associated Press