At United Continental Holdings (NASDAQ:UAL), it's clear that the buck stops nowhere. Last week, the struggling U.S. legacy carrier reported a huge adjusted loss of $489 million for Q1. Meanwhile, its top competitors -- including Delta Air Lines (NYSE:DAL) and American Airlines (NASDAQ:AAL) -- each earned hundreds of millions of dollars.
United executives rolled out a new wave of excuses to explain away both the poor Q1 performance and weak guidance for Q2. To some extent, I'm sure they are right that overlapping systems from United and Continental, high growth by other carriers in Asia, and the pilot shortage at regional airlines are causing big headaches.
However, at some point, the management team has to be held accountable for performance. United Continental is already two years past the biggest integration milestones, yet it continues to lose ground vis-a-vis every other major airline. It's time for the Board of Directors to step up and replace all of United's top executives and see if a new management team can do better.
Falling behind -- way behind
In early 2012, just over a year after the United-Continental merger closed, the integration process seemed to be in fairly good shape. United reported a solid $1.3 billion pre-tax profit for 2011, driven primarily by a 9.2% unit revenue increase: the best among the legacy carriers.
Since then, United's relative performance within the airline industry has declined rapidly. Last year, United's pre-tax adjusted profit totaled $1.1 billion: down about $200 million from 2011. In the same span of time, Delta Air Lines improved its pre-tax adjusted profit from $1.2 billion to a stunning $2.7 billion. Analysts now expect Delta to earn nearly $4 billion this year before taxes.
American Airlines has also reported steady margin growth recently, and it improved its Q1 pre-tax margin by 3.6 percentage points. The company appears to be well-positioned for strong margin growth through the rest of 2014, too. American is projecting a 4%-6% increase in unit revenue for Q2.
Meanwhile, United is still floundering. The company's Q2 guidance calls for a meager 1%-3% unit revenue increase, with a large chunk of that gain attributable to the calendar shift of Easter from Q1 to Q2 this year. That would produce very modest profit improvement for United this quarter.
It's not getting better
As I have written previously, most airline analysts have been far too kind to United Continental in the past year or so. With the airline industry showing rapid profit growth, many analysts have assumed that United is bound to follow the rising tide. However, based on the combative tone of United's recent conference call, it appears that even formerly strident bulls are having second thoughts about United.
Most of the initiatives that United executives have raised as "fixes" for its unit revenue problems are very minor in nature. For example, United is optimizing its revenue management system, working to boost ancillary revenue, changing flight schedules in Houston and Denver, more actively matching aircraft size to demand, and cutting some flights in Tokyo.
However, United faces significant structural problems that will get worse -- not better -- as time goes on. First, United's hub in Newark is one of the company's crown jewels, but the recent Delta-Virgin Atlantic joint venture has left United as a distant third in the New York-London market: the most important international business travel market.
Second, competitors like American and Delta are working to close the gap with United for Asia service. Both airlines are starting two new U.S.-Asia flights in June. Combined with the long-term growth trajectory of several Chinese airlines, this will keep up the pressure on United's transpacific routes.
Third, United's highly profitable transcontinental routes from JFK Airport in New York to Los Angeles and San Francisco are about to get a whole lot more competitive. All things considered, Q2 could very well be the easiest quarter of the year for United -- yet it will still post subpar results.
Time for some pink slips
The airline industry is a cyclical business, and it's pretty clear that we are approaching the high point of the cycle. Industry conditions are about as favorable today as they ever have been, yet United is still barely profitable, with a pre-tax margin of less than 3% for the last 12 months. In a year or two, the industry "tide" will probably start flowing the other way, dramatically ratcheting up the pressure on United's earnings.
Airline integrations are tough, and the United management team may have been dealt a bad hand in terms of other headwinds like route-specific competitive capacity increases.
However, the fact remains that United's management team isn't getting the job done. By now, United should be gaining ground on the rest of the industry in terms of margin performance. Instead, it is falling even further behind.
With several airlines having merged in the last few years, there are plenty of experienced airline executives who are out of the industry right now. It's time to give another group of leaders a chance to run United Airlines. It would be hard for them to do any worse than the current management team.