Thus far, United Continental (NYSE:UAL) has had a relatively disappointing 2012. The integration of the United and Continental brands has resulted in poor operational performance. Passengers have suffered from computer glitches, long airport lines, frequent flight delays, and excessive flight cancellations. This has caused United to underperform the airline industry in terms of revenue gains this year. Some frequent fliers reportedly switched their flying to competitors such as American (AAMRQ.PK) and Delta (NYSE:DAL) this past spring. While United Continental still expects to achieve revenue synergies from the merger, up to this point there have been revenue losses.
However, it may now be United's turn to benefit from a competitor's problems. American Airlines has been facing massive unrest amongst its pilot group, particularly since a bankruptcy court judge allowed the airline to cancel its pilot contract earlier this month. Since then, pilots have taken more sick leave than usual, and have also submitted an abnormally high number of maintenance requests. While the union denies encouraging a "sickout", it is fairly clear that the pilots' actions are driven by their discontent with their contract situation.
With pilots calling in sick and filing spurious maintenance requests, American Airlines has been forced to scrap numerous flights (as much as 5% of its schedule on some days). The increase in maintenance requests has also caused cascading delays throughout the American Airlines network. American's on time rating was below 50% for Sunday, Monday, and Tuesday of last week, well below peers. American eventually announced that it would cut its September/October capacity by as much as 2% as a prophylactic. However, as of yesterday, customers were still seeing abnormally high delays. According to the Chicago Tribune, only 49% of flights arrived on time between 9/16 and 9/24.
Frequent delays and cancellations understandably aggravate customers. Business customers, who are the most lucrative, tend to run on tight schedules, and so flight delays mean a substantial loss of productivity. The scale of delays over the past week and a half is likely to be a significant deterrent to business travelers. Some American Airlines customers may have even bought last minute tickets with other airlines upon learning that their flights were canceled or severely delayed.
American's latest problem gives United a second chance at winning customers over. United has the most overlap with American's network of any other airline; the two share hubs at Chicago's O'Hare Airport and Los Angeles International Airport. American and United also compete heavily in New York, but United's hub is at Newark Airport, while American's operations are concentrated at LaGuardia and JFK. The delays and cancellations at American may send some customers to United this fall, given the extent of route overlap between the two. Moreover, if United can show customers that it has overcome its operational problems from earlier this year, it will have a good chance to retain those customers in the future. The market currently has low expectations for United, projecting flat revenue on a year-over-year basis for Q3 and Q4. If United can steal some business traffic from American this fall, I think there is upside to the Q4 revenue (and earnings) estimates.
While United is best positioned to profit from chaos at American Airlines, Southwest (NYSE:LUV), JetBlue (NASDAQ:JBLU), and Delta could be secondary beneficiaries. Southwest, JetBlue, and Delta have the best reputations for reliability and customer service in the industry today. Each of those carriers has significant overlap with American in at least one of its core markets. If customers who are put off by bad service at American Airlines gravitate towards airlines with the best service, Southwest, JetBlue, and Delta could see measurable benefits to revenue and earnings.
Disclosure: I am long DAL, UAL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.