United still bedeviled 2 years after merger

It’s ‘work in progress, says CEO

A ground crew member refuels a United Continental plane in June at San Diego International Airport. Merger glitches are still plaguing the airline, now the world’s largest.

A ground crew member refuels a United Continental plane in June at San Diego International Airport. Merger glitches are still plaguing the airline, now the world’s largest.

Sunday, December 2, 2012

— It was supposed to be a moment for celebration: United Airlines observing the delivery of its second Boeing 787 Dreamliner with a flight from Seattle to Chicago last month for a select group of employees, while senior officers, including Jeffery Smisek, United’s hard-charging chief executive officer, served Champagne and took lunch orders.

But before the flight took off, a glitch in one of the airline’s computer systems delayed 250 flights around the world for two hours.

So it goes at United these days.

The world’s biggest airline, created after United merged with Continental Airlines in 2010, promised an unparalleled global network, with eight major hubs and 5,500 daily flights serving nearly 400 destinations. As an added benefit, the new airline would be led by Smisek of Continental, which was known for its attention to customer service.

But two years on, United still grapples with myriad problems in integrating the two airlines, resulting in hobbled operations, angry passengers and soured employee relations.

United’s list of troubles this year is long.

United has the worst operational record among the nation’s top 15 airlines. Its on-time arrival rate in the 12 months through September was just 77.5 percent — 6 percentage points below the industry average and 10 percentage points lower than Delta Air Lines. It had the highest rate of regularly delayed flights this summer and generated more customer complaints than all other airlines combined in July, according to the U.S. Department of Transportation.

Its reservation system failed twice, shutting its website, disabling airport kiosks and stranding passengers as flights were delayed or canceled. The day of the 787 flight, another system, which records the aircraft’s weight once passengers and bags are loaded, shut down because of a programming error.

The airline even angered the mayor of Houston, Continental’s longtime home and still the carrier’s biggest hub, when it unsuccessfully sought to block Southwest Airlines’ bid to take international flights to the city’s smaller airport, Hobby.

The merger also is weighing on the company’s finances. It took a $60 million charge in the third quarter for mergerrelated expenses, including repainting planes. It also took a $454 million charge to cover a future cash payment to pilots under a tentative deal reached in August.

While most large airlines reported profits this year, United has lost $103 million in the first three quarters of 2012, with revenue up just 1 percent to $28.5 billion. Its shares, meanwhile, are up 7 percent this year compared with a 12 percent gain for the Standard & Poor’s 500 stock index and a 24 percent gain for Delta.

“United remains at a challenging point,” analysts from Barclays wrote recently, and they forecast that the carrier would not begin to see the benefits of its merger until late in 2013 and into 2014. Still, while airlines initially struggle, mergers increase revenue eventually, as the example of Delta’s acquisition of Northwest Airlines demonstrated two years ago.

Smisek, taking a break from serving coffee halfway through the maiden 787 flight, acknowledged things were not going as fast as expected, particularly given the aggressive targets he set two years ago. Back then, Smisek said the merger would be wrapped up in 12 to 18 months. He has since learned to be patient, he said.

“It is still a work in progress,” he said. “The integration of two airlines takes years. It’s very complex. If you look at where we were two years ago, we’ve come a long way.”

Airline mergers are complicated and involve combining different technologies, old computer systems, and thousands of procedures used by pilots and flight dispatchers, gate agents, flight attendants and ground crews.

Setbacks are common. Like United, US Airways experienced a breakdown in its booking technology after it combined with America West in 2005. Delta’s on-time performance fell sharply in the year after its purchase of Northwest.

But today, Delta is a leader among big airlines in on-time performance. US Airways had a record third-quarter profit even though it still lacks common work rules for its pilots seven years after its merger.

United has completed many of its merger tasks, particularly with passengers. It has received its single operating certificate from the Federal Aviation Administration, allowing it to run a combined fleet. Despite all the problems this summer, it claims to have finally merged the reservation and technology systems.

A remaining sticking point is getting employees of the two merged carriers to agree to a single contract. Pilot unions signed a tentative agreement with the company in August, months after bitter negotiations. Talks are continuing for agreements with unions representing flight attendants and mechanics.

“There always seems to be some bump in the road,” said Ray Neidl, a senior aerospace and airline analyst with the Maxim Group. He said much of the merger’s benefits would kick in after the airline got its collective agreements with its work force. “Once they get these challenges out of the way, United will be a powerhouse.”

For many analysts, United’s real challenge lies in combining different work groups with different cultures, values and ways of doing things.

That is particularly true for United, which had a history of sour labor relations, and Continental, long considered one of the nation’s best-run airlines.

“You know, the cultural change takes time,” Smisek said. “And people resist change. People are sort of set in their ways.”

He added the airline was now intent on providing better operational performance and consistently good customer service. “And there are people who don’t like that,” he said. “I understand that. What I want is those people to either change or leave.”

The airline moved its headquarters to the Willis Tower in Chicago last year. In June, it set up a new Network Operations Center, occupying a full floor in the tower in a vast open space previously used as a trading floor. From here, managers run daily operations, overseeing flight schedules, crew availability, weather forecasts and any delays throughout the system.

After the summer’s mishaps and poor performance, United has improved its on-time record. In particular, it said, arrivals on-time last month were 85 percent.

“We think we’re in a good spot given where we are in the merger,” said Peter McDonald, United’s chief operations officer.

Business, Pages 61 on 12/02/2012