True or False? United is Rising. United’s encouraging Q3 result suggests better times ahead

It’s the cold, hard truth: United Airlines, with a 6% operating margin, was America’s least profitable airline for the 12 months to September—even troubled Virgin America did better. But this is also true: last quarter alone, United showed the strongest y/y earnings improvement among all U.S. airlines, with its revenues up more than 3% and its operating costs down almost 3%, a more than five-point differential. Is the sick man of the U.S. airline industry nursing itself back to health, wealth and prosperity?

As recently as early 2012, United was earning quarterly margins comparable to Delta’s and certainly superior to those of the pre-restructured American, then itself the industry’s sick man. But the summer of 2012 saw an integration-related operational and service meltdown that sent many United customers defecting to other airlines. United then bungled its revenue management, selling out flights too early. It angered frequent fliers by calling them “over-entitled.” A botched integration of crew scheduling software led to mass cancellations and pilot ire. Executives publicly blamed prior management for failing to properly maintain B747s (for reliability not safety) and inadequately training and investing in employees. United recently hired its third chief information officer since the 2010 United-Continental merger. And all the while, United’s close rival American achieved a significant cost advantage by going through bankruptcy, as well as a sharp revenue advantage in some markets by merging with US Airways. In 2013, American’s operating margin was a full three points higher. Delta’s was four points higher. Revenue growth for United, meanwhile, despite an extremely strong overall revenue environment, barely outgrew cost inflation despite a drop in fuel prices.

The first quarter of this year wasn’t any better. In fact, it was worse: United actually lost money—a lot of money—while all other carriers except Hawaiian and Virgin America profited. The second quarter was better in the sense that United earned a solid 10% operating margin, a figure that would have made it the envy of the industry a decade ago. But in 2014, that 10% made it a laggard, and its unit revenue growth remained weak relative to peers.

But something happened in the third quarter. From July through September, it narrowed the margin gap with American and Delta, outperformed them on unit revenue growth and more or less matched them on non-fuel cost containment. Its relative performance would have been even better had Delta not enjoyed substantial fuel hedge gains and had American not fully captured the tailwind from falling fuel prices by not hedging.

Are United’s worst days finally behind it. And if so, what accounts for the sudden momentum?

For one, United seems to have gotten its act together on operations, running a more reliable airline, with an on-time arrival rate of 77% in the 12 months to September, according to DOT statistics. This…

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