United Continental Investors Expect Turbulence After Earnings Beat

In this segment from Market Foolery, Chris Hill welcomes Motley Fool analysts Jim Mueller and David Kretzmann to the show to cover United Continental Holdings (UAL -0.45%) and its latest quarterly results.

But what they -- and probably any investor in the airline industry -- really want to know is whether all the outrage over the appalling treatment of a passenger will ultimately affect the company's business.

Chris Hill: Let's move on to United Continental Holdings. First-quarter profits came in higher than expected, and I don't know about you guys, but I almost don't care about this quarter. I know that technically, this quarter for United included the incident with the doctor getting dragged off the plane. But I am already looking forward to three months from now, to see...isn't that really the big question that's on the mind of certainly anyone who focuses on the business media, and anyone who is investing? I think this is one of the most interesting questions that's going to play out in the short term right now. How tangible is this outrage? There was plenty of outrage online over the doctor being dragged off the plane and coming back on the plane and being bloody and all that. Does that translate into a meaningful decline in United Continental's business?

Jim Mueller: You're both looking at me. [laughs] 

Hill: I'm looking at both of you. And I don't know, I look at this and think, part of me -- and I don't own shares of this or any other airline, but we talked a little bit about this earlier, David, part of me is rooting for them to get a little bit of pain here.

David Kretzmann: Yeah, they need to feel some sting, some pain after that.

Hill: Yeah. But it also would not surprise me, given the way the airline industry runs as a whole, it would not surprise me if, three months from now, we were talking about, "Yep, it was another good quarter for United Continental."

Mueller: I don't think it's going to matter one bit, to tell you the truth. I was doing some reading before coming in the studio. There was an episode of Freakonomics from last June called "Why Does Everyone Hate Flying?" The answer is probably because it has become like mass transit. The cost of a flight, all in, including everything -- inflation, baggage fees, buying a meal, everything -- is half of what it was 30 years ago. The safety record of airlines is tremendously good. The last two accidents with major U.S. airlines, the last one was the Asiana flight coming into San Francisco -- three people died, and one of them was killed on the ground after being hit by an emergency vehicle. So only two passengers died from the crash. Before that, it was 2001, some 12 years earlier, when there were 265 people killed on the American Airlines flight out of JFK. Now, for a while, people were thinking it was shot down, that one. In that 12-year span, 442,600 people were killed on U.S. roads. Mass transit is what airlines are. When you get that, you get low fares, which is very important for a lot of people, but you also get a lot of inconvenience and, occasionally, you get beaten up. [laughs] 

Kretzmann: [laughs] That's what we learned a couple weeks ago.

Hill: And along those lines, a big part of the story with United was the whole really shining a light on airlines overbooking. But once the statistic started to come to light, you find out that yes, technically, this still goes on. It goes on a lot less than it used to.

Mueller: That's true.

Hill: So I don't know. Again, I feel like nothing would shock me three months from now in terms of results, in part because one X-factor at play here is the United States Congress, which, it would not surprise me at all if they decided, "You know what's going to make us look good?" Because few things have as low of an approval rating in America as the United States Congress. "What's going to make us look good is hauling Oscar Munoz, the CEO of United Continental, in front of us at a hearing and beating him up for a while."

Mueller: That's probably going to happen. But what I think would be better for the industry, and for passengers, too, is if competitors started coming out with ways to mitigate a lot of this bad press that everybody is getting. It's not just United. United is in the crosshairs right now, but they all do this, and the carriage of contracts, which is what the ticket is, allows them to do almost anything they want to. But if they're smart, they're going to say, to differentiate themselves, "We don't do this."

Kretzmann: We don't beat you up. [laughs] 

Mueller: I've heard the food is coming back to one of them, [Delta Air Lines], maybe, coming back to the economy class, and you don't have to buy. Your ticket is going to go up a little. But a lot of people grumble about having to buy the box of three-week-old bread or whatever.

Hill: I mentioned this to each of you individually this morning. We've seen businesses in other industries do very well with loyalty programs. We see it, certainly, with food and beverage. Why don't airlines go bigger into the loyalty programs? When I'm on a flight and they make the obligatory announcements about, "If you want our frequent-flyer card, we'll give you 10,000 miles." Why don't they just right out of the gate astonish everyone with "We're going to give you a 100,000 miles," just to get you into that program? To go back to Netflix for a second, one of the mistakes I think investors make about Netflix is in thinking that video streaming is a zero-sum game. It's not like buying a car. When you go out to buy a car, one automaker is going to win your business, and all the others are going to lose. When it comes to video streaming, yeah, you're going to have an Amazon Prime account, you're going to have a Hulu account, you're going to have a Netflix account. In terms of the airlines, I feel like if one of them gets smart and figures out a way to lock people into some sort of loyalty program that rewards customers, they're going to be a big winner.

Kretzmann: I think you're describing Southwest, at least more than any of the other major airlines in the U.S. And Southwest has been an incredible performer not just in airlines, but across the S&P 500. It's one of the best-performing, if not the best-performing, over the last 30 years since it went public in the late '70s. Southwest has locked down that loyalty program. I have a Southwest card. I prefer to fly Southwest if they have a route between the cities I'm flying to. And I think that's an important point, because for me, I lose track of United, Delta, American. It's like, I know I booked with them, I'm probably going to get delayed, I'll probably get some warm orange juice on the flight, it's not going to be a pleasant experience, but it will get me where I need to be, probably just a little bit later than I would like.

And I actually had a friend who came up to me last week and said, "Did you see that video of what happened on the Delta flight?" I was like, "Do you mean the United flight?" I don't think there's a whole lot of brand differentiation at the end of the day with some of those airlines. But I think Southwest has done a good job with that loyalty program. One of the perks of that is, Southwest doesn't make their flights available on third-party platforms like Expedia or Priceline. People have to go to Southwest's site, and it reinforces the brand that way. When you have a positive experience, I think you get a loyal customer base.

Mueller: And I think therein lies the answer to your question, Chris, is commoditization. Those airline miles that can be transferred across airlines, you can get them from almost any credit card you want. They're so cheap, and they are no longer worth what they used to be worth.