United is Planning to Narrow the Gap with Rivals

This Tuesday, United Continental Holdings Inc. announced that it is reviewing the role of its eight big airport hubs as part of a broader effort to close its profit gap with rivals.

United has struggled since its creation. Its 2010 merger established an airline with one of the best route networks alongside a host of challenges, including operational problems that delayed and canceled flights and poor labor relations. United’s focus, for a long time, has been wrestling with operational and service problems that have lost it lucrative corporate fliers, who have found it easier to switch to rivals. The airline has a lower market share at its big hubs compared with those operated by American Airlines Group Inc. (NASDAQ: AAL) and Delta Air Lines Inc (NYSE: DAL).

Chicago-based United has improved its on-time flying and brokered deals with some unions, and though the gap between its profit margins and those at American and Delta halved to around 2.4 percentage points in 2015 compared with the prior year, the divide has started to widen again, according to analysts at Wolfe Research LLC.

“We’re going to refine the mission,” United Chief Executive Oscar Munoz said of the hubs during an investor call, with the results to be announced later this year.

Mr. Munoz had set a nine-month time frame for a broad strategic review following his appointment as CEO last September. This slipped after he suffered a heart attack the following month, and was further delayed by a spat with activist investors this year that concluded with the turnover of half of its board.

The hub review is part of a wider strategic rethink at United, whose profits have lagged behind rivals which are able to cut costs and secure higher ticket prices. The airline on Tuesday outlined plans to boost lift revenue and trim expenses by a cumulative $3.1 billion between 2015 and 2018.

Beforehand, U.S. airlines have closed or shrunk a number of airport hubs over the past decade, with United Airline shuttering Cleveland in 2014, focusing its operations at seven U.S. cities. It already has reduced flying from its largest hub in Houston, shifting capacity to San Francisco and Denver because of the energy industry downturn.

United’s big ambition is to secure almost half of the financial improvements, some $1.5 billion over the three years, by securing additional revenue and higher fares by better segmenting its passengers according to their willingness to pay. And it also said its closely watched average fare metric will be at the higher end of prior guidance in the second quarter. Shares recently were up 3% at $44.71.

Analysts don’t expect the third-largest U.S. airline by traffic to close any hubs that funnel passengers through its wider domestic and international network, but it may shuffle more flying between the cities. In addition, some of which are skeptical about United’s ability to close the margin gap, given that Delta in particular has made greater strides to improve on-time flying and onboard service. It has offered a greater range of fares such as stripped-down ticket prices aimed at fending off discount carriers like Spirit Airlines Inc.

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