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Originally published Thursday, July 26, 2012 at 5:04 AM

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United 2Q profit falls as merger issues remain

United Airlines said absorbing Continental pushed its second-quarter profit down 37 percent as workers and passengers endured changes ranging from new software to fewer spare planes.

AP Airlines Writer

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United Airlines said absorbing Continental pushed its second-quarter profit down 37 percent as workers and passengers endured changes ranging from new software to fewer spare planes.

On Thursday, CEO Jeff Smisek acknowledged during a conference call that "we added new stress to the system" with all the changes the airline tried at once. He said there's an "aggressive effort" under way to get it fixed.

United is adding maintenance workers and airport staff, restoring spare airplanes, and trying to make the software that its ticket agents use to check in passengers easier to use, he said.

The airline is flying under the United name now, but behind the scenes, some of it still operates like two separate airlines, and Continental flight crews still fly Continental planes.

In March, United moved to a single computer system for bookings and frequent-flier programs. Hiccups in the transition annoyed some of its best passengers - the ones who wanted upgrades to first-class. Calling the airline often meant waiting on hold for more than an hour.

In May, United began flying Continental planes on United routes, and vice versa. It flew Continental's 737s into United's hub in Chicago, and flying United's Airbus planes into Houston, a Continental hub, CEO Jeff Smisek said. That was an adjustment for ground crews, especially during bad weather or busy travel days.

The airline also hasn't been able to reduce its reliance on spare planes as fast as it hoped. The old United had 15 spares a day to replace planes with mechanical issues. But then it adopted Continental's practice of pulling planes out of flying duty more often for preventative maintenance. It even hired more mechanics, said Pete McDonald, the airline's chief operations officer.

But with fewer spares, long delays and cancellations rose, CEO Jeff Smisek said. United is restoring some of those spares, although it eventually hopes to be able to reduce the number over the long-term, he said.

"I know we caused some customer disservice because of all the changes we've made so quickly, and I apologize for that," Smisek said. "We hold ourselves to a higher customer service and reliability standard than we delivered for our customers lately, and we will return to the level of service and reliability our customers expect." It was the second quarterly conference call in a row where he had to apologize for merger problems.

Computer issues have also made it harder to estimate ticket pricing. At United, per-seat passenger revenue rose just 3 percent for the quarter, in part because of integration issues. On Wednesday, Delta Air Lines posted an 8.5 percent increase and US Airways had a 5.8 percent increase.

United Continental Holdings Inc. earned $339 million for the quarter, or 89 cents per share. Excluding integration costs and other items of $206 million, United would have earned $545 million, or $1.41 per share. A year earlier, United earned $538 million, or $1.39 per share.

Revenue rose 1.3 percent to $9.94 billion.

The merger troubles led S&P Capital IQ analyst Jim Corridore to downgrade United Continental shares to "Hold," from "Buy."

"While we think long term the merger will bring great benefits, we have less confidence in management's ability to manage the integration in the near term," he wrote.

Shares of the Chicago-based company fell $1.22, or 6 percent, to close at 19.19.

United is still negotiating for a joint contract to cover all of its pilots. It didn't offer any updates on that front on Thursday. "The longer this drags out, the longer it may take to realize the full benefits of the merger," Maxim Group analyst Ray Neidl wrote in a note.

The two biggest U.S. airlines, United and Delta, are both shrinking the amount of flying they do this year - as much as 1.5 percent at United. It said flying capacity would be flat to up 1 percent next year.

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