The bad news just keeps on coming for United Airlines and its parent
On Tuesday the company reported a record quarterly profit that, nevertheless, was partially overshadowed by its own admission that unit revenues are so soft that it will have to rein in its planned second half capacity growth.
Then yesterday
One is tempted to blow off the Chinese hacking reports as no big deal. No doubt many people will do just that. And United
But there are bigger problems here for United. To be sure, there’s much to be concerned about in terms of what the Chinese potentially can do with the mountains of data they’re accumulating from their United hack, plus that from their growing number of hacks into U.S. government agencies and other commercial computer systems. But we’ll leave it to others to examine in more detail those national and personal data security concerns.
For United specifically, news of the Chinese hack follows by three weeks the second of two major disruptions of its passenger data and flight management computer system since June 1. Taken together, the three events (and other widely-publicized negative events in the past 12 months) paint a picture of a house in disorder at United. It doesn’t help that United officials keep offering up implausible and/or weak explanations for their problems and continue to ignore (at least publicly) the mounting evidence of a company that’s not in full control of itself.
Officials at the world’s second-largest airline previously tried to dismiss both of the system disruptions this summer – especially the second one, which effectively grounded the airline for nearly three hours on a peak summer vacation travel day - as minor technical glitches that got more news attention than they deserved. But nobody paying even half-way close attention is buying it.
For example, the second disruption, they said, was the result of a “router failure.” Apparently they were hoping that we all would think “Oh yeah, I know how cranky my little plastic router at home can be” and give them a pass.
But a company the size of United ($39 billion in revenues in 2014), which has been 100 percent dependent upon technology to transact its business for more than 40 years, doesn’t use routers like those cheap units most of us use at home. Rather, its data communications system operates – or at least should operate – using a very sophisticated set of software and equipment located in multiple locations, and with multiple layers of redundancy specifically to prevent anything even resembling a “router failure” from ever happening. So the July 7 outage could not possibly have been the result of a simple router failure as most of us would envision such. Rather, it was, no doubt, a very significant failure of software and/or hardware – precisely the kind of failure companies of the size and sophistication of United should NEVER experience. Exactly what caused it is almost - though not quite - meaningless.
Analysts immediately blamed both recent outages on United Continental’s very rough, and unusually protracted merger integration following the 2010 marriage of the formerly bankrupt United to Continental Airlines (management of the smaller, but more successful Continental's effetively took control of the combined enterprise). Fair or not, those system outages make it seem as though United Continental’s management still doesn’t have its act entirely together five years after the merger was completed.
And there’s plenty of supporting evidence to strengthen that storyline, whether it’s true – or fair - or not.
Even the company’s record second-quarter results, announced Tuesday, reinforced that prevailing view. Yes, the company earned an all-time quarterly record of $1.19 billion. But that’s largely the result of a 32 percent drop in the price it paid for fuel in the second quarter. United's second quarter revenue actually dropped 4 percent from the same period last year. And its unit revenue – or how much it receives to fly each passenger one mile – fell by 5.6 percent.
Worse, its unit revenue is expected to drop 5 percent to 7 percent in the third-quarter, typically the biggest and most important quarter of the year for airlines. The biggest culprit: an expected 9 percent to 11 percent drop in unit revenues on international routes, where economic weakness in Asia, by far United’s most important foreign market, is becoming a big drag. United’s hub in energy industry-centric Houston also is feeling the impact of the big slowdown in the oil industry, offsetting some of the fuel price savings from which it, like all airlines, is benefitting.
In response, United officials said Tuesday that they’re backing off on previously planned capacity growth plans for the second half of this year. The carrier’s capacity now will rise only by about 1 percent to 1.5 percent across the back-half of 2015.
Additionally, United management’s relationship with its labor unions and their members – never good - is growing worse rapidly. And the company’s announcement Tuesday of a $3 billion stock buy-back program that follows on the heels of a previous $1 billion buy-back, has upset labor leaders further. Additionally, in April the Federal Aviation Administration called out United for what it labeled “systemic” problems in the system the airline uses to qualify and schedule its pilots.
As a result, these new revelations of Chinese hacking only reinforce and magnify the “screwed-up United” storyline. It’s not at all clear what the hackers have done, or can do with the more than a year’s worth of data they quite likely pirated from United. Nor is it known if – or which - other airlines also have been targeted by the Chinese.
But the fact that United only found out from U.S. government investigators in April that the Chinese had been playing around inside their supposedly sophisticated and well-guarded systems for more than a year adds to the perception that United’s management is failing to manage the basics.
Not surprisingly, that second, whopping $3 billion stock buyback plan announced this week is being viewed by some as a desperate attempt to placate worried investors. And it certainly feeds complaints from labor and, increasingly, others that perhaps some of that money being paid to the notoriously fickle investors who buy and sell airline stocks the way most people change underwear would be better spent fixing the airline’s nagging technology and operational problems. Or, perhaps, some of that buy-back money could be better spent improving service at what by nearly all service quality measures is the poorest performing of the big airlines.
Taken together, these events paint a picture of a company that would be losing money, and performing almost as poorly as the old, pre-bankruptcy/pre-merger United performed if it weren’t for the huge windfall presented by the big one-third drop in the price of jet fuel from the second quarter of 2014.
Management can – and does – argue that things at United and its parent company aren’t as bad as these recent events make them seem. And they may even be right.
But in a business that remains as intensely competitive as the airline business continues to be, even after all the consolidation of the last decade, public perception and confidence remain critically important. And the year-long, undetected Chinese hacking of United’s systems is being seen as particularly damaging further evidence that United Continental still does not have its act together.
