New UAL Faces System Issues

The integration process of United Continental Holdings Inc. ( UAL - Analyst Report ) was finally over yesterday, after the passenger services for both United and Continental were combined. United Continental implemented a single loyalty program, Mileage Plus, which was the final and key milestone in the integration process.

United Continental Holdings was formed in October 2010 by the merger of Continental Airlines and United Airlines and since then the companies were operating as two separate entities. The merger created the world’s largest airline, overtaking Delta Air Lines Inc. ( DAL - Analyst Report ) , which acquired Northwest Airlines in 2008. The company received a single operating certificate from Federal Aviation Administration on November 30, 2011.

But the combined company’s new reservation system faced several technical and service issues causing flight delays, problems at check-in kiosks and failing phone connections. The failure of self-service kiosks led to long passenger queues.

Reservation glitches could take a toll on the demand for United Continental’s services relative to its peers resulting in higher costs and revenue loss. We believe these hurdles will only impede services of the new entity in the near term as it tries to resolve these problems.

The risk in migrating to a single reservation system reminds us of US Airways Group ( LCC - Snapshot Report ) , which also faced hurdles in combining the reservation systems of the former America West Airlines and US Airways in 2005.

United Continental also completed the transition of the Continental website into the new United website, technical issues notwithstanding. United and Continental had already joined their gates and fleets. Most of their check-in and ticket counter facilities were relocated and Continental’s fleet was repainted in the new United livery.

The combination is expected to generate net annual synergies of $1 billion to $1.2 billion by 2013, with $800 million to $900 million in additional revenue and $200 million to $300 million in cost savings. Approximately 25% of total synergies were realized last year. With the sector’s best cash position, industry-leading revenues and a competitive cost structure, the complete integration will provide improved access from Continental hubs to United’s strong Asia network and from United’s hubs to Continental’s international network in Latin America and Europe.

We are currently maintaining our long-term Neutral recommendation on United Continental. For the short term (1-3 months), the stock retains a Zacks #3 (Hold) Rank.