United Continental Holdings Inc (NYSE:UAL) CEO Jeff Smisek has been marketing United as “the world’s leading airline” for the past year. At an industry conference last month, Smisek stated that he wasn’t worried about American Airlines taking the title of the world’s largest airline following the latter’s merger with US Airways Group, Inc. (NYSE:LCC) . Instead he was focused on the goal of being the world’s leading airline. This entails having the best route network to get people where they need to go, and providing strong customer service along the way.
Unfortunately for United and its customers, reality doesn’t quite live up to Smisek’s vision. The 2013 Airline Quality Rating survey (an annual study of various quality of service metrics for the U.S. airline industry) put United at the bottom of the list (No. 14). Furthermore, the No. 12 and No. 13 airlines — SkyWest, Inc. (NASDAQ:SKYW) subsidiaries SkyWest, Inc. (NASDAQ:SKYW) and ExpressJet Airlines — are regional carriers doing most of their flying for United. United’s poor service quality will make it difficult for the airline to sustain its historical revenue premium. As a result, I believe the market is overestimating United’s ability to bounce back quickly from its disappointing 2012 earnings performance.
Survey says!
The Airline Quality Rating survey (link opens a PDF) takes into account four criteria: on-time performance, denied boarding frequency (aka “getting bumped”), mishandled baggage, and customer complaints. For 2012, United and its regional partners were near the bottom of the pile in terms of on-time performance and mishandled baggage, and were by far the worst offenders in terms of denied boardings and customer complaints. United’s overall score of -2.18 was far worse than the scores for its major competitors:
| Airline | Rating (smaller negative number is better) |
|---|---|
| American Airlines | -1.11 |
| Delta Air Lines (NYSE:DAL) | -0.58 |
| Southwest Airlines (NYSE:LUV) | -0.81 |
| United Airlines | -2.18 |
| US Airways | -0.87 |
Data from 2013 Airline Quality Rating survey
United Continental’s performance significantly deteriorated compared to 2011, when United scored -1.45 and Continental scored -1.41. Much of this drop can be attributed to the difficult merger integration process, particularly a number of IT system problems that disrupted flight schedules and hurt customer service. Nevertheless, even if the company had maintained its 2011 rating, that still would have placed it significantly behind all of its major competitors.
Why it matters
Despite its poor service compared to peers and unit revenue growth near the bottom of the industry for 2012, United still maintains a modest revenue premium over competitors. This is partially the result of having hubs in many of the biggest and wealthiest cities in the country. However, it its also partially a legacy of Continental Airlines’ reputation for superior service. As recently as 2009, Continental was the top-ranked network carrier in the AQR survey. However, United Continental has lost that customer service advantage to Delta, and it should not be surprising that Delta has subsequently closed much of the revenue gap between itself and United.
United simply cannot be the “world’s leading airline” unless it makes a massive effort to get on the same page with employees, improves its internal processes, and regains its place as the top-ranked network carrier in the AQR survey. Delta’s service improvements mean that United has to become much better than it ever was in the past — even before its 2012 setback — to stop the slow drain of high-value customers from United to Delta. For example, Delta is aggressively expanding in New York and investing heavily in its facilities there to challenge United’s hub at Newark Airport. Delta has already seen some success in winning new corporate contracts in New York, most of which would otherwise have gone to United.
Foolish conclusion
United Airlines wants to be the world’s leading airline, but in 2012, it was actually the worst airline in America. United’s strong route network cannot overcome the airline’s poor quality of service. While the company has made progress on its merger integration process, it is far from being competitive with Delta and other leaders on the customer service front. This is likely to hurt revenue growth and could drag down United’s stock over time.
The article “The World’s Leading Airline” Is Actually the Worst in the U.S. originally appeared on Fool.com.
Adam Levine-Weinberg is short shares of United Continental Holdings (NYSE:UAL) and is long Sep 2013 $33 Puts on United Continental Holdings. The Motley Fool recommends Southwest Airlines.
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