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The 2 Most Worrisome Quotes to Come Out of the United Airlines Earning Call Last Week

United announced a Q1 loss last week and even the company said they were “extremely disappointed” in the results, especially in the face of profitable quarters from their competitors (you can read the whole transcript of the earnings call here).

The whole call was pretty rough, with management saying that their 4-pronged plan to improve revenues was solid — 1) Drive later higher-yield bookings; 2) Re-bank flights in Houston and Denver to maximize connections; 3) Sell more premium cabin seats at booking (bye bye upgrades); 4) Better match aircraft size to demand. They also had issues on the cost side, which seemed to receive less attention than the revenue side, though both were disappointing, with margins 500 basis points below competition.

I’m not sure I’d agree that the whole thing was a disaster, but it wasn’t good, and if you don’t believe in their overall plan, then you are likely a bit worried about what the next year looks like, relative to competitors.

I wanted to point out 2 interesting parts of the call:

1) It smells like we’ll be seeing a move to a Delta/Southwest/JetBlue/Virgin America-like revenue-based program. Not tomorrow, but some day. Check this out from Jeff Smisek:

Our frequent flyer program is evolving and as are others. And what we’re trying to do is better align the benefits that we deliver to our customers through the frequent flyer program with the benefits that the customers deliver to us from their flying, including the profitability of their flying. And I believe that you will see evolution of our program over time. We can’t talk about specifics at this point in time, but clearly, this is an evolving process. And frequent flyer — our frequent flyer program is becoming much more sophisticated and is better aligning the benefits bidirectionally.

I think I see where that’s going. Combine that with the focus on selling domestic upgrades at sale, and I think the United frequent flyer experience looks different in 18 months.

2) Analyst Jamie Baker asked an incredibly damning and probably spot-on question that gets to the heart of the matter:

Have you considered at any point that perhaps, not just perhaps, there is a more structural explanation as to why results are being held back? For example, we cited, and others have as well, that you face more competition in your hubs than American and Delta do? If I jump in a taxi in San Fran or Denver and say, “Take me to the airport.” the guy asks, “Who are you flying?” And that just doesn’t happen in Charlotte. You’ve pursued a 4-cabin strategy that should be generating a RASM premium, but currently isn’t. And I appreciate all the talk about winglets and Wi-Fi and the like, but I’m just not convinced that even if properly executed, even if properly mined, United has the same profit potential as your primary competitors.

In other words, whether we like the management team or not, is it possible that structurally United cannot thrive relative to competition? That’s a tough question, and the response by Smisek (long-winded, but basically we have performed poorly from an operations perspective and that’s driven away revenue, but we have a plan to fix that) probably did not inspire confidence in the airline’s frequent flyers, who have experienced those operational deficiencies.

The transcript is worth a read, because you can hear the frustration from the analyst community, one of whom prefaced a question with “One of the many excuses we heard last year…”

Ouch.

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  1. If you use the 70% definition for fortress hub, then US/AA is going to have:
    DFW
    CLT
    PHL

    UA has
    IAD
    EWR
    IAH

    so I don’t really get the one analyst’s point. He picked SFO and DEN which aren’t the best examples.

  2. Like everyone else, I’ve been surprised by UA’s poor financial performance. Given the assets they have — and the pound of flesh they’ve already extracted from their frequent flyers — it should be better. If things don’t improve quickly there, I expect Smisek to be gone within a year (if I were on the Board, I’d fire him today).

    There’s no question that the Big Three are going to all go to some sort of revenue-based frequent flyer program. I listened to American’s conference call, and Scott Kirby basically said AA would do the same (whenever they could get to it due to their current focus on integration).

    There are some smart people out there who don’t believe that giving more benefits to the highest paying customers is actually the right business move, though. The thought is that, for other reasons, these people will buy these high priced tickets anyway. There is some belief that good ff benefits actually attract the marginal customer. I honestly don’t know. If I were the CEO of AA or UA, I’d be studying this consumer behavior closely. The conventional wisdom on all this could be wrong.

  3. Maybe you should reconsider your standard airline advice (not really advice, of course) to invest in the airline as a hedge. Perhaps it’s just time to get out of UA altogether… :roll:

    • Oh man – I hate when my own advice comes back to bite me in the ass :)

      That said, their stock is up about 30% over the past 12 months. I stand by my hedging strategy.

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