The headline in the business section of The Chicago Tribune screamed "United Doubles Up On Profit" (see article here). You would think United airlines (see chart here) was a great story of turnaround success. After all, the airline only returned out of bankruptcy about 18 months ago. And the stock has doubled from its 12 month lows. But is all well at UAL?
When we read the article we learn that profits are up largely due to United’s ongoing cost cutting programs. They keep beating up on employees to do more work for less money. And United used bankruptcy to strip down much of its pension payouts, further giving to employees (past and present) on the chin. United didn’t improve it’s performance with customers or improve its productivity and thereby improve profits. It just spent less.
Closely tied to United’s long-term profits is its charges for airplanes. And a different article (see article here), which preceded the earnings announcement by 3 days, stated that United was falling behind on its new airplane orders. United has stopped buying replacement planes, and that has helped the company lower its expenses. In other words, United is squeezing down the company to be smaller, and not reinvesting even for maintenance, much less growth. In fact, according to the article, United is so far behind on placing orders for new planes the company is at jeopardy of being able to get any replacement aircraft to keep its fleet in the air! The aircraft manufacturying industry capacity is sold out for several years into the future, and United isn’t on the list to get any new equipment.
So while United is cheering about its LAST quarter, its FUTURE prospects look bleak. UAL has literally traded its future for today. Management is de-investing in order to produce current profits, while simultaneously asking employees to sacrifice in order to keep the company alive. This is the ultimate in Defend & Extend Management, where the leadership gives up the future, and gives up its employees future, in order to defend its own decisions and actions. The United leadership team is so Locked-in to trying to present its outdated Success Formaul as capable that it is killing the company in its effort to present immediate profits.
Investors should not cheer this latest profit news. Rather, they should recognize that United has probably turned the corner from the Swamp into the Whirlpool. Without the wherewithal to purchase more airplanes, in the future there will be no airline. No matter what last quarter’s profits were.