Road Warrior

For United, Big Problems at Biggest Airline

Jad Mouawad, The New York Times
Source: United Airlines

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 earlier this month for a select group of employees, while senior officers, including Jeffery A. Smisek, United's hard-charging chief executive, served Champagne and took lunch orders.

But before the flight took off that morning, a computer glitch in one of the airline's computer systems delayed 250 flights around the world for two hours. (Read more: United Operations Resume After Computer Outage)

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 Mr. Smisek of Continental, which was known for its attention to customer service.

But two years on, United still grapples with a myriad problems in integrating the two airlines. The result has been hobbled operations, angry passengers and soured relations with employees.

The list of United's troubles this year has been long. Its reservation system failed twice, shutting its Web site, 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.

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 — six 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 Transportation Department.

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 bring international flights to the city's smaller airport, Hobby.

The United-Continental merger is weighing on the company's finances. It took a $60 million charge in the third quarter for merger-related 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 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 last month, 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.

Mr. Smisek, taking a break from serving coffee halfway through the maiden 787 flight, acknowledged that things were not going as fast as expected, particularly given the aggressive targets he set two years ago. Back then, Mr. 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."

Admittedly, the process is complicated. Airline mergers mean combining different technologies, often old computer systems, as well as thousands of procedures used by pilots and flight dispatchers, gate agents, flight attendants and ground crew.

Setbacks are common. Like United, US Airways experienced a breakdown in its booking technology after its combination 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 as far as passengers are concerned. 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.

Mr. Smisek said passengers would see the benefits of the combination by next year as United introduces new features on its planes, including satellite-based Wi-Fi, flatbed seats in business class and bigger overhead bins on its fleet of Airbus narrow-body planes.

One of the remaining sticking points, however, 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, after months of 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," Mr. 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."

There are few lasting advantages in the airline business. Airlines can easily match what rivals are doing, whether by lowering fares, buying new planes or installing new features on their aircraft. But United insists that its network remains its most resilient strength and will help it attract more passengers.

The carrier's dominant market share at Newark Liberty International Airport, for instance, appears unassailable and provides a formidable gateway to the New York and East Coast markets. United's Houston hub is a major jumping point to Latin America. And United is the biggest carrier in San Francisco, giving it an advantage in the Pacific, where it is the biggest American carrier.

United is counting on new planes to make a difference in coming years. It has made a big bet by ordering 270 planes over the next decade, including 50 Boeing 787s and 25 Airbus A350s.

The 787's long-range ability and relatively smaller size will allow United to add new direct service between cities that did not have enough traffic to justify bigger planes like the Boeing 777. Its 787s will fly between Houston and Lagos, Nigeria, starting in January, followed by service from Denver to Tokyo's Narita airport in March, and from Los Angeles to Tokyo and Shanghai. (Read more: United to Fly Denver-Tokyo Nonstop With Boeing 787s)

United is betting that passengers will be drawn by those new services as well as by the 787's carbon-fiber technology, which allows higher levels of humidity and oxygen in the cabin and can, Boeing claims, help reduce jet lag-related fatigue. (Read more: Onboard United's Inaugural 787 Dreamliner Flight)

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 this month were 85 percent.

"We think we're in a good spot given where we are in the merger," said Peter D. McDonald, United's chief operations officer.

Still, perceptions may be tough to fight, particularly online and in frequent-flier forums, where criticism of United's service and performance has been particularly bitter. One critic, who goes by @FakeUnitedJeff, parodies Mr. Smisek on Twitter. One post last month read: "It's raining in Newark. I wish we'd bought waterproof aircraft. Cancel, cancel, cancel."