Time To Sell United Airlines! Management is Destroying the Brand
Management’s overarching goal should be to maximize profits. It’s my belief that United Airlines is doing a fabulous job of this! Why then would I advise you to sell the airline’s shares which currently trade at 3 times earnings?
Warren Buffett advises owning a company with great management. Invest in them, then leave them free to do their thing. In fact, Warren recently stated that one of the mistakes he repeats over and over is “not being willing to pay a premium for a company with great management.” In other words, he regrets being cheap and not being willing to pay a premium for well run companies.
But wait a second, aren’t you saying that United is doing a great job maximizing profits? And trading at 3 times earnings. What gives man? Why am I confused? Okay, let’s break this down into two parts.
Cheap Price to Earnings
Airlines earnings are very cyclical, and are especially correlated to fuel prices. Right now the airlines are reaping in profits as oil has dropped precipitously from past heights, and with it jet fuel prices, which make up a huge percentage of the cost of running an airline (especially on longer hauls.) Profits go boom and bust, with airlines sometimes incurring multi-billion dollar losses. Investors aren’t willing to pay hefty premiums for these companies, which right now are in a boom cycle.
Management Maximizing profits
I am a person … of some means. I can afford an airline ticket, but overall, I’m pretty price sensitive. (editors note: cheap)
Currently I am trying to redeem an expiring voucher for a trip abroad. As I write this, I have been on hold for half an hour waiting to speak to a representative to validate the voucher. That’s in addition to a hour and a quarter I spent this morning, only (then) to FINALLY ascertain that the booking agents could NOT connect me to customer service. And this horrendous cost United that hour and quarter of pointless labor as well.
The reason for this- 4 days ago I emailed “customer service” to ask about the voucher. Assuming that the email had not gone through, I emailed again two days later. The one thing I learned from the booking agents was to expect an email back “within 7-10 business days.”
7-10 Business days?? I think if I had a letter sent to United Airlines via the Pony Express in the year 1850, I’d have gotten a reply more quickly.
Further, the agents aren’t well trained, and lack the authority to do anything.
Now, take a look at the competition, Delta, Southwest. far superior, responses within 24 hours. I had a Southwest agent call me to clarify something 12 hours after I sent them an email. Delta, might be far more frugal than Southwest, but at least they give a prompt answer.
By cutting back on staff and support, United WILL certainly maximize profits in the near term. The stock might even spike, as traders look only at the bottom line. Cut costs and profits (near term go up.) Way to go CEO!
Brand- the Problem
The other thing Warren Buffett pays a premium for- brand. Coca-Cola, American Express, Wells Fargo, three of Berkshire Hathaway’s (Warren’s company) biggest holdings all have carefully cultivated brands. So do Apple and Google for you techies out there. A company’s name is mentioned and you have an automatic association to it. … I’ve now been on hold with United for 40 minutes …
So, you want to cut costs Mr. United CEO, you want to have customer service response times that would get put out of business by the Pony Express? Hold times longer than the IRS? And agents with less power than DMV Clerks. Well guess what. Short run you’ll book all that revenue at higher margins.
Long run, what happens? People like me desert your airline in droves! Cash out your options now Mr. CEO. You’ve gutted the company. No company outside of a government granted/ Soviet style monopoly can survive with this type of customer service.
My association to the United Airlines brand is currently only slightly more mild than to a Nazi Swastika. Even with cheaper prices than any other airlines (which United RARELY has) I’m still going to be willing to pay-up not to do business with you.
Point being, United Airlines is gutting their brand in the interest of near term quarterly results. There is 0% chance I'm the only one who feels this way. 50 minutes and counting ...