United Continental Struggles to Ride Out Post-Merger Turbulence

by Susan J. Aluise | November 16, 2012 1:45 pm

United Continental Struggles to Ride Out Post-Merger Turbulence

Fasten your seat belts, United Continental (NYSE:UAL[1]) flyers: It’s going to be a bumpy ride.

Heading into the biggest travel week of the year, a new round of computer glitches and PR headaches is likely to make passengers think twice before booking a flight with the world’s largest airlines.

Since the airline consolidated United’s and Continental’s reservation systems in March, the combined airline has been hammered by unexpected computer glitches that have delayed or cancelled thousands of flights, invoking the wrath of stranded travelers. The latest in a cascade of computer glitches in recent months took down UAL’s dispatching system for about two hours on Thursday morning[2], initially delaying about 200 flights.

As is usually the case when flights are delayed early in the day, the delays rippled across the system, eventually stranding thousands. The new system snafu sent UAL shares down 2.4% on a day when most other major airline shares were up slightly.

While the financial impact of cancelled and delayed flights is significant — income, operating and passenger revenue plummeted[3] in the airline’s fiscal third quarter — the PR hit is even more worrisome. Reliability concerns are prompting customers — particularly profitable business customers — to book away from the airline.

Airline industry consolidation delivers strong business benefits and economies of scale, but mega-airline marriages are tough on all parties at the beginning. Major mergers between Delta Air Lines (NYSE:DAL[4]) and Northwest in 2008 and US Airways (NYSE:LCC[5]) and America West in 2005 have proven the importance of details. Integration challenges run the gamut, from culture wars and labor challenges to systems glitches while combining flight schedules and reservations systems.

UAL has struggled mightily with the latter this year. The airline’s on-time performance crashed to a new low of 64.1% in July over reservation systems glitches. A whopping 3.6% of the carrier’s flights were delayed 70% of the time in July, compared to an industry rate of 1.2%. The carrier racked up 995 consumer complaints that month — nearly half the total of all 15 airlines the Bureau of Transportation Statistics tracks monthly.

The company even cited its system difficulties when reporting that its share of corporate fliers fell short of expectations[6] in August.

Although UAL has been moving in the right direction — 82% of its flights were on time in September[7] — the improved performance still is far from good.

The devil has been in even the smallest details. UAL’s first attempt to merge its future flight schedules in May 2011 went horribly awry when the computer system inadvertently reinstated United Flight Nos. 93 and 175 — two flights that were hijacked and crashed by terrorists on 9/11. It went unnoticed by UAL until employees and customers stumbled across the future schedules online, creating a PR fracas.

Bottom line: UAL has to figure out these systems problems — fast. “We are now running a reliable airline again,” CEO Jeff Smisek said in the airline’s earnings call last month. But it looks like he could be eating his own words instead of turkey this Thanksgiving.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.

Endnotes:
  1. UAL: http://studio-5.financialcontent.com/investplace/quote?Symbol=UAL
  2. took down UAL’s dispatching system for about two hours on Thursday morning: http://articles.chicagotribune.com/2012-11-15/business/ct-biz-1116-united-outage-20121116_1_jeff-smisek-charlie-hobart-reservation-system
  3. income, operating and passenger revenue plummeted: http://www.bizjournals.com/houston/news/2012/10/25/united-continental-income-drops-in-q3.html
  4. DAL: http://studio-5.financialcontent.com/investplace/quote?Symbol=DAL
  5. LCC: http://studio-5.financialcontent.com/investplace/quote?Symbol=LCC
  6. its share of corporate fliers fell short of expectations: http://articles.chicagotribune.com/2012-09-11/business/chi-united-airlines-revenue-falls-in-august-20120911_1_passenger-load-factor-traffic
  7. 82% of its flights were on time in September: http://investorplace.com/2012/11/the-best-and-worst-u-s-airlines-in-september-2/

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