The Wall Street Journal
By Susan Carey
Oct. 27, 2017 3:18 p.m. ET
United Continental Holdings Inc. has promised investors for years that it will close the profit-margin gap with its major rivals and start delivering the fruits of its 2010 merger. But the third-largest U.S. carrier by traffic continues to be an industry laggard.
As airlines wrapped up third-quarter earnings this week, United posted in-line but tepid results and gave a disappointing outlook for costs and revenue in the final quarter. Despite ambitious cost-shaving and revenue-enhancing initiatives announced nearly a year ago, the Chicago-based carrier is still far from catching up with industry darling Delta Air Lines Inc. by most measures.
Oscar Munoz, United’s 59-year-old chief executive, has asked investors for more time.
“We’ve dug ourselves historically in a little bit of a competitive hole as a company,” he said during a call with analysts and investors last week. “In order to get ourselves out of it, we have to do something a little bit [more] extraordinary than others.
“This team has only been in place really for a year, and we’re just getting our mojo working,” he added.
The day of the call, investors lost patience. United shares suffered a 12% one-day selloff last Thursday and have yet to recover. The selling spree helped shaved $7.6 billion from the company’s market capitalization since the stock’s June high. Shares are down nearly 18% year to date, and were trading flat at $60.03 Friday.
Investors and analysts who follow the stock said they are frustrated that United appears to be more focused on providing reasons for the lack of progress than on addressing cost headwinds that now extend into 2018. On the earnings call, United executives refused to talk about 2018 costs and capacity growth, which they normally would.
They also failed to provide detailed results from cost and revenue initiatives announced last year. Those steps were aimed at $4.8 billion in earnings improvements through 2020, including some $1.8 billion by the end of this year. Aside from saying most of the initiatives were on track, United executives wouldn’t speak about that work.
“It’s been six years postmerger, and it’s one excuse after another” at United, said Hunter Keay, of Wolfe Research, referring to the merger of United and Continental . “New faces, same results.”
United declined to make executives available for comment.
United has an enviable network. It is the largest U.S. carrier to Asia, enjoys a strong footprint to Europe and Latin America, and has well-placed domestic hubs in big business centers.
Yet it produces lower revenue than its two big rivals. American Airlines Group Inc. produced a 2.7% gain in third-quarter revenue to $10.9 billion. Delta’s revenue grew 6% to $11.1 billion in the period. United’s revenue slipped 0.4% to $9.9 billion.
And United’s unit revenue, a closely watched measure of the amount taken in for each seat flown per mile, is expected to fall by 1% to 3% in the fourth quarter, after a 3.7% third-quarter decline. American expects a gain of 2.5% to 4.5% after eking out a small increase in the latest quarter.
Investors also are concerned about margins, or earnings before taxes as a percent of total revenue. At United, that measure has been the lowest among the four largest U.S. carriers since 2014. United’s fourth-quarter guidance is for margin of 3% to 5%. Delta is guiding for margin of 11% to 13%.
This summer, United began adding more flights to smaller cities from its hubs, growing more than rivals, and started fighting discount airlines. The new flights were aimed at chasing what United President Scott Kirby calls the airline’s “natural share” of the market, which it had ceded over years of domestic shrinkage.
But investors are concerned that growing seats at a time when costs are rising doesn’t bode well for the carrier’s margins.
United’s effort to battle discount airlines sent its fares down, particularly when one of those competitors sharply dropped its last-minute ticket prices. Meanwhile, the rollout of United’s answer to that competitive threat—low-cost, low-perk Basic Economy tickets—wasn’t initially successful.
“Our Basic Economy rollout went well operationally, but from a revenue perspective, it started out rocky,” Mr. Kirby said on the call.
United’s postmerger existence has been fraught. The airline’s former CEO was ousted in 2015, and Mr. Munoz, a director with no airline management experience, took over. A few weeks into his tenure, Mr. Munoz suffered a heart attack and, later, had a heart transplant that kept him out of action for five months. Under activist pressure, United refreshed its director slate to include people with airline experience, including a former Delta executive and a former Air Canada CEO.
But there have been bright spots. After Mr. Munoz returned, he succeeded in winning labor peace among United’s 85,000 workers. The company introduced a new international business-class product, and assembled a new management team, importing a chief financial officer from a discount carrier and bringing in Mr. Kirby, who surprised the industry by decamping from American last year.
One person with knowledge of the C-suite said Mr. Munoz, who is two years into a five-year contract, retains the confidence of his board. “There is no thought of any kind of regime change,” this person said, adding that the management team needs to overcome some current challenges and do a better job communicating.
“United’s shares could spend some time in the penalty box until we get a more realistic, measurable and consistent strategic direction from the company,” said Brandon Oglenski, of Barclays Capital.
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