What Would YOU do with United Airlines?
(exceprts from Holly Hegemen, Plane Business 3/28/04)
Over the last several months, we've debated the situation facing US Airways and the related revenue versus cost issue. Last week, as part of a private discourse back and forth with a United Airlines' captain, the discussion came down to one issue. It is the same issue facing Air Canada and the same issue Delta, American, Continental, Northwest, and US Airways also face.
That question?
While the legacy carriers and their hub and spoke systems are not dead, it is certainly evident that in a reduced revenue environment, it puts those airlines that utilize such a system, along with an antiquated pricing structure, at a revenue disadvantage.
If the current revenue environment stays basically the same -- what is the right operational path for United Airlines? In other words, if you were CEO Glenn Tilton, what would you be doing in an attempt to restructure the airline so that it becomes a profitable entity?
Last week, in a position paper, Kevin Mitchell of the Business Travel Coalition, wrote,
"As a recent Business Travel Coalition survey suggests, while the falloff in business travel may have bottomed out, the forward looking revenue environment appears anemic. Indeed, much of the 4% growth in business travel traffic that BTC projects for 2004 will likely be atributable to low-fare carriers' stimulation of demand as they enter an ever expanding number of markets and discipline major airlines' pricing.
Major network airlines have still not fully grasped that the market place for commercial air transportation services is not only experiencing a cyclical squeeze, but is in the throes of structural change, which carries vastly different implications. For example, when any industry enters a cyclical downturn, layoffs are made with the assumption that workers will be rehired afrter the cycle turns up again. On the other hand, when an industry experiences structural change, it is expected that the laid off workers will never be replaced.
The airline industry has changed structurally, but not everyone agrees yet. Just last week at an indusry conference, a leading airline economist stated with absolute conviction one of the largely debunked "immutable laws" -- the business traveler is price insensitive. He said that if a business traveler has a need to go to Atlanta, he is going irrespective of price. In his example, if a major airline lowered its business airfares, the airline would simply receive less revenues, and gain nothing.
This analysis is flat out wrong, ignores the structural shift the industry is experiencing and perpetuates flawed strategies and lost market shares at the major network airlines.....the business traveler is now permanently price sensitive....
The conclusion is inescapable, whether assessing the imminent assault on Philadelphia by Southwest, or the phenomenal expansion plans of JetBlue. No major network airline can survive without radical changes to the way they currently operate their businesses. No major network airline has restructured to the extent necessary for success. Costs must be significantly lowered, asset productivity levels must be vastly improved and airlines must discover true customer-centered strategies."
I think Kevin is spot on.
But let's focus on the situation at United in particular for this exercise. Here are some of the main overview issues that I do not see the airline tackling so far in their restructuring process.
Regional Jets
Feedback I'm getting from comments being made by Delta's CEO Gerald Grinstein, as he travels around the Delta system, suggest that perhaps he senses vulnerability with Delta -- a result of its large regional jet network.
We've talked now for over a year as to whether or not increased regional jet deployment is a good thing, or a not-so-good thing, now that the revenue equation has changed.
Yet, at both United Airlines and US Airways, the attitude seems to be "Damn the naysayers -- full speed ahead." But ahead with what? Ahead, apparently, with a business model that in many cases was built on inflated, mystifying regional contracts and questionable profits.
On the other hand, Continental Airlines, in late 2001, was the first major airline to publicly cut back its planned regional expansion.
American Airlines has also been content to stick with a fairly conservative regional growth program. True, the airline was hamstrung in its growth by pilot contract limitations, but there were ways the airline could get around these limitations, and they've just done this out of St. Louis, for example.
But clearly, Delta Air Lines and United Airlines are the two biggest regional operators, with US Airways having proposed last year that it wanted to play "catch up" and substantially increase the number of its regional jets as well.
But, is this the right thing to do? Has anyone at United simply stopped dead in his or her tracks, and instead of trying to scramble to make the current model work, somehow, someway -- which is exactly the impression you get when you read through the independent examiner's report that was filed last week -- did anyone start with the proverbial clean sheet of paper and start working on a business plan from scratch, assuming that what worked before will no longer work now?
Oddly enough, the more I hear about Gerald Grinstein's comments of late, I have the impression that this man may be one person who may just have one of those big white pads on his desk.
We've also looked at the issue of "creative" contracts between regional airlines and their major partners. You know -- those contracts that existed and still exist between major airlines and many of their regional carriers. The ones where real profits and real costs are sometimes impossible to figure out.
How have these contracts skewed the way major airlines have planned for the future in the past, and could American, for instance, be sitting in a favored position over United and Delta now -- because it does not have the far-flung regional networks, and their associated baggage?
If you subscribe to the idea that the major carriers of the future will fly big airplanes and not smaller ones -- where do regionals fit in?
And let's face it -- where do the economics of a larger airline make sense? On longer-haul flights. On larger aircraft.
If you subscribe to this idea, then where does this leave the regionals?
Is Atlantic Coast Crazy?
Another point. If you follow this line of thinking, maybe Atlantic Coast is not crazy after all.
Maybe Atlantic Coast is simply the first regional airline to see the future, and in fact, what we may see in the next five to 10 years is a move where regional airlines do, in fact, become stand-alone-entities.
Just stop and think for a minute about the trends we are already seeing with the regional sector. Brainstorm with me here.
Looking out five years, perhaps some regionals will fly solo, but others will fly for major airlines. But things won't be nearly as cozy as they are now for some regionals. No, the regionals will have to be fully independent entities. Not mere appendages of the major airlines.
After all, if the major airline has to sink or swim -- and make more money than it loses, why shouldn't the regional airline be expected to do the same?
Then there is the JetBlue addition to the mix. Not content to rule the major airways with its Airbus aircraft, the airline is set to embark on a major invasion of smaller markets with its 100-seat Embraer aircraft.
How does this change the landscape?
And finally, let's not forget the weight and balance issue now affecting every airplane from a Beech 1900 to a Boeing 737.
With the FAA raising the "average" weight estimates of passengers, in addition to increasing allowances for on-board baggage and checked baggage, obviously the smaller aircraft are going to be hit hardest by the changes.
In fact, it is my understanding that in "random testing," the new average weights the FAA has mandated are not even adequate.
How will these changes affect operators of the 50 seaters? Even 70 seaters?
But more specifically to United, and back to the bigger overview question, how does the airline's extensive regional network fit into a new business plan going forward? One that will be profitable?
Long Haul Flying: Where Amenities Do Count
I think it is a given that on longer-haul flights, the major airlines have to at least offer a product that is comparable to its new lower fare competitors. But, at a price that is competitive, not mind-boggling.
If not, frequent flyer miles or no frequent flyer miles, the major airlines will start to see erosion of their passenger base.
How has United made sure that its premium product has remained not only competitive, but superior?
If the airline has not done so, what do they need to do to make sure this is the case?
Corporate Culture
In talking to the folks I know at United, passengers who fly the airline, and to corporate travel managers, I don't sense any real concrete changes to the airline's previous culture. Oh, there has been an increase in advertising, and there has been the hyped introduction and marketing of Ted -- but has there been any real change in the day to day operating culture of the airline?
No.
Has there been a noticeable improvement in service levels? In customer service improvements?
Not that I have heard about or detected.
Contrast this to Delta, where the new CEO has, right off the bat, identified several major corporate culture problems, in addition to product problems and serious morale problems. He has identified them publicly, including the fact that planes and gate areas in many cases are shabby. He has already taken steps to remedy some of them. I expect we'll hear about more efforts after he has completed his ongoing review of the company.
At American, CEO Gerard Arpey has made a number of moves that tell me he knows he has serious culture issues. Has he hit a home run on all of his efforts? No. But he has at least identified that there are problems and is working to improve the situation.
While you are aware of the initiative the airline has begun in an attempt to improve communications between the airline and its employees, are you also aware that when Gerard travels around the system, he has mandated that the old "meet and greet" pomp and circumstance ceremonial B.S. be eliminated? He doesn't want it. Nor, from what I hear, does he have much use for executives still at the airline who still insist on getting it.
These are the types of things I am talking about. Streamlining management, making management more accessible, improving communication between management and employees, giving employees the empowerment to do a better job, improving the service levels your passengers receive.
Is United doing any of this? If so, where. Is it working?
If not, why not? And how could the airline do a better job?
Now's Your Chance To Be a CEO
I could go on, but having said my $0.02 at least --now's your turn.
Our latest subscriber participation project is entitled:
"If I were CEO of United, I would..."
You fill in the blank. With as much commentary as you want. But hey, I'm looking for some serious thinking here. Some specifics. Don't write me and say, "If I were CEO of United, I would... drink heavily."
Although, that's probably not a bad response. Yes, humorous responses are welcome -- as always. And goodness knows, we probably need them!
But, I'm serious about this. I'm looking for some serious thinking here.
When you submit your response, please let me know if I can refer to you by name, or if you need to remain anonymous. And please, it would be nice if some of you intelligent types out there would let me give you some credit for a change.
Although, I guess if you work for United, that's probably not possible.
Anyway -- here's the deal. Get these comments in before April 9. Just put "United CEO" in the subject line of your email so I can easily file them in the proper email folder.
April 9 is not that far off -- so get started this week! I'll badger you between now and then.
Yes, I'll also award something to the person who comes up with the plan that seems to be the best of the bunch. But it's a surprise. I'll tell you more as we get closer to our deadline for entries.
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Shares of Delta Air Lines were hammered last week as well -- a one-two punch of higher than expected losses already announced, and the fact that the airline also does not have much of its fuel hedged effectively for the first quarter. According to Linenberg, the airline only has 32% of its 2004 fuel needs covered with reasonable hedges.
As if this wasn't enough, Standard & Poor's dropped the airline's debt rating two notches last week, the second S&P downgrade of the airline since January.