The past week has been extremely rough for United Airlines' (UAL -2.01%) customers and employees. An uptick in flight cancellations initially sparked by bad weather and FAA staffing issues spiraled out of control, leading to an operational meltdown reminiscent of Southwest Airlines' late-2022 fiasco.
Operational miscues have become all too common at U.S. airlines recently, due to the lingering impacts of the COVID-19 pandemic on staffing and training levels, both at the FAA and individual airlines. Yet United's recent problems are particularly concerning because they expose management's hubris. That raises uncomfortable questions about other ways management's overconfidence could come back to bite United shareholders.
An operational downward spiral
United's recent troubles began last weekend, when an FAA staffing shortage compounded the impact of inclement weather in the New York area, causing a slew of flight delays and cancellations.
These issues impacted all airlines with significant operations in New York. However, United canceled far more flights than its peers, and the problems lingered for much longer.
United Airlines canceled at least a quarter of its mainline schedule every day from Monday through Wednesday, even as cancellations receded to just 3% of scheduled flights for the rest of the industry by Wednesday. United's operation began to recover later in the week, but the carrier still canceled 18% of its mainline flights on Thursday and 8% of its mainline flights on Friday, according to FlightAware.
Image source: United Airlines.
United's unusually rough week stemmed at least in part from insufficient staffing in its crew scheduling department. For example, flight attendants were forced to wait for hours on hold to get new assignments after their flights were canceled. Technology limitations may have played a role, too. "The airline actually 'lost' crews in the system for days on end," according to United's flight attendants union. United's pilots also blamed management for "poor planning" that led to the meltdown.
Hubris on display
So far, United Airlines hasn't quantified the cost of the past week's flight cancellations, but it could conceivably total $100 million or more. (Southwest estimated the pre-tax cost of its much larger meltdown last December at $800 million.) A one-time cost of that magnitude wouldn't hurt United too much. Additionally, while operational problems can lead to a near-term downturn in bookings, these lingering impacts typically dissipate within months.
However, this operational breakdown was notable because management claimed just months ago that United had made the technology investments, staffing adjustments, and other changes needed to avoid such problems.
The company filled its fourth quarter earnings presentation with numerous references to how United's operational performance was near the best in the industry in late December of 2022 and the first two weeks of 2023. Management claimed that United had a "large head start" over competitors on its technology systems, that the carrier had added spare aircraft and staffing buffers to avoid cascading cancellations, and that United had made "significant improvements and investments in crew scheduling tools."
Source: United Airlines Q4 2022 earnings presentation, slide 8.
Today, it seems clear that management dramatically overestimated the airline's operational capabilities. Company executives' repeated claims that United is ahead of the curve in adapting to the new industry operating environment now ring hollow.
What else is management missing?
If management could so thoroughly overestimate the company's operational prowess, investors should consider how else United's leadership could be setting the airline up for failure through overconfidence.
For example, CEO Scott Kirby believes that the pandemic has given legacy carriers like United a long-term structural advantage over discounters. United is implementing an ambitious growth strategy to capitalize on that potential opportunity. The company plans to spend $8.5 billion on capital expenditures this year, and capex could continue at that level (or higher) for at least two more years.
If all goes well, these investments will enable strong revenue growth and margin expansion over the next few years. However, if management's rosy view of the future industry environment also stems from overconfidence, this plan could backfire spectacularly, leaving United with a crushing debt load.
United's management hasn't shown itself to be reliable enough to justify betting on this risky growth strategy. As a result, while I am generally bullish about the airline industry's recovery, I plan to steer clear of United Airlines stock.
