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Do We Even Know Why United Airlines Is Struggling Relative to Its Peers?

I’ve been really fascinated with why United Airlines has continued to struggle, even as its peers in the airline industry have long turned a financial corner. I’m in a Q&A kinda mood this week, so let’s Q and then let’s A what the hell is going on at United.

Q: What the hell is going on at United?
A: Here’s what’s most interesting to me: Continental was the first real turnaround story in the airline industry in the 1990s and 2000s. Most airlines that struggled back then just disappeared. Gordon Bethune was the poster boy for how to turn a mess of an airline into a world leader. He made his employees happy to work there, he upgraded the product (BusinessFirst), and he focused the network (hubs in Newark, Cleveland, Houston and Guam). It brings tears to my eyes to even write that, because it seems so obvious now. But it wasn’t.

Q: If things were so good, why did they merge with United?
A: The industry needed to shrink. Except for a few boom years, the industry struggled as a whole and reducing the number of airlines was the best way to get pricing where it needed to be (this is true of most commodity businesses – fewer competitors brings pricing power. My wife works in the paper industry, and the same thing is happening there.) The unfortunate part about that consolidation is that the one well-run airline felt they could not survive as a standalone business. That’s a shame, because those of us who were fans of Continental were heartbroken to learn that about the merger.

Q: Why?
A: Because Continental offered a really solid product with employees who seemed to care. United had old planes and employees who had years of misery. I think that most of us who flew Continental feared the worst – that merging those 2 companies would be a mess. And we were right! (yay us?)

Q: Is there anything United could learn from the Delta/Northwest merger?
A: The Delta and Northwest merger was smart but also benefitted from good timing, forcing the airline to execute brilliantly as they were combining the airlines during the economic crisis. Northwest likely would not have survived on its own, and combining with Delta created a large competitor, while pulling capacity out of the marketplace allowing the entire industry to raise prices. Delta’s pretty early success with the merger allowed them some room to invest in upgraded onboard products, creating a point of differentiation for them relative to United, American and US Airways. United and Continental have struggled to get their backend systems combined (which is generally not brought up as a reason that airline mergers struggle – people always talk about fleets and networks, but those are easily changed, relative to the difficulty of combining reservations systems). That’s taken the focus away from other areas, while Delta (and American to an extent, but mostly Delta) has improved their product.

Q: So if United improved their onboard product things would be OK?
A: No. If only it were that simple. United says their problems stem from operational issues (ie, late flights and cancelations), increased competition to China, and cost issues relative to their peers. And although they’ve brought on newer 737s, they haven’t invested in their product the way Delta has (have you flown a former United 757?). But their problems go beyond just having an inferior product.

Q: Like what?
A: I’ve read 2 quotes from analyst that I think get to the root of the matter. Airline analyst Jamie Baker asked on the last earnings call: “I’m just not convinced that even if properly executed, even if properly mined, United has the same profit potential as your primary competitors.” And in a recent Barrons article an analyst from Wolfe Research is quoted as saying “We believe [United Continental] has a structural deficiency relative to peers. We believe this deficiency is partly a result of a network that is too large and uses planes that are not optimized for the routes they serve. We believe in order to fix this problem there must be a willingness to forego revenues in order to save costs. We believe bad IT and poor customer service metrics exacerbated the problem, but good IT and better customer service can’t completely fix it.”

Q: Ouch.
A: Right? It’s not a simple problem – it just shows how complex the airline industry is. Like I said earlier, when airlines merge people always talk about whether there are now too many aircraft types, or whether their networks are compatible. It’s not that simple. US Airways (and now American) is a very well-run airline. The guys who run US Airways did an amazing job turning around America West, then turning around US Airways and, at least for now, are starting AA of on the right foot. United isn’t struggling because their flights are late or their A320s are old, they’re struggling because their flights are late, their A320s are old, their IT infrastructure isn’t modern, they probably have 1-2 too many hubs, they face significant low-fare competition at Denver, fuel is expensive, a stronger US Airways at PHL means that some people who used to drive to Newark from Central New Jersey will now go to PHL for cheaper flights, their planes are old, they have too many routes (58% more than Delta), they are facing increased competition to Asia, and their employees aren’t happy.

Q: That’s not good.
A: No, it’s not. As the guys from Wolfe Research said in that same article “We believe planes need to be put down without replacement, we believe the associated headcount must be evaluated, and we believe a hard and honest evaluation of the value of the current network will yield a difficult conclusion: fewer planes, fewer cities served, and less revenue might result in lower costs and higher profits. We believe current [United Continental] management will get there.” In other words, they’ve got to shrink. Sadly, they were shrunk when they were separate airlines and perhaps United could have been allowed to die. But that wasn’t going to happen (according to management United was turning a corner when the merger happened). We can argue all day long whether they are correct with their point that current management can implement the changes.

Q: Running an airline is difficult, isn’t it?
A: Yes! Very. It’s a utility and a manufacturing business (they manufacture connections at hubs), and an operational nightmare that is bogged down by acts of God, and it’s a consumer facing, customer service heavy nightmare. Airlines have basically failed since deregulation, except for a handful of lowfare carriers that have avoided running complicated networks (Allegiant and Spirit), and Southwest (which was as much a customer service and branding play as anything, and they’re so unique I’m not even sure other airlines can learn anything from them). Oh, and probably Alaska. The new Delta is only a couple of years old. US Airways and America West were successes, both only for a few years before they were swallowed up. So many things have to go right, and you need such a strong leader that, in the end, I don’t know if we can even say that there is a formula for how to run a large network-based airline profitably over the long haul.

Q: That doesn’t bode well for United.
A: No, it doesn’t. But they’re not on the verge of bankruptcy, and they have enough cash to ride out some tough times. I think it comes down to whether their employees believe that the current management has a vision and ability to turn the thing around. That’s the biggest question to me: new seats and closing Denver won’t matter if employees are miserable. And happy employees don’t matter if they’re getting slammed in Asia. So many things have to go right. But I think it starts with whether the staff believes Jeff Smisek can fix it.

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  1. :evil:
    A CO fanboi. Now that I know, I’ll unsubscribe. Thanks.

  2. Ok I am finally forgiving you for “finding religion” when it comes to credit card pimping. Great, insightful post

  3. Simple answer. Delta=trying their best. United=stagnant.

    Recently I have flown both United and Delta with their new slimline seats. The Delta seats are a different model; better. The United seats have a useless tray table (too small) and the pouch won’t even hold a watter bottle! United seems to add a row of seats with every flight I take, not so much with Delta. I’m willing to pay a couple of dollars more on Delta for comfort, everything out of Newark requires a flight change whereas United has the most non-stops. I thave to take the good with the bad.

  4. Compare my recent experiences on UA and DL as an example of why UA is struggling. Both were evening flights from CVG to NYC with thunderstorms in NY.

    DL early on delayed the flight to 10pm so I knew I could just go to the lounge and get some work done. DL flew a newer Embraer with Econ. Comfort seats. When we got on the plane the Captain gave us free booze for the 3 hour delay. And when we took off we actually landed in NY.

    UA just kept delaying the flight further every half hour so you never knew when you would take off. They flew an old 2×1 seating Embraer. No “freebies” for the delay. We took off, circled outside NY and eventually diverted to Hartford. Arriving back at EWR, we had to wait 15 min to get someone to move the gate.

    As an old CO fan who enjoyed the free 1st class certificates when booking a Y fare and the food in coach, it’s sad to switch away. But for flying out of NY, DL and JetBlue offer a superior product and service at the same price.

  5. The most insightful piece on UA has seen. I am going to end my recent 1K experiment because I am sick of being late coming and going on business trips, I need Delta’s reliability (and some upgrades).

  6. I think UA’s fundamental problem is that nobody really likes the company. Too much bean counting; not enough “fun.” As a 1K, UA constantly reminds me that I’m not really special to them. I go to the UA Club at the airport: it sucks. Many of the employees look for reasons to say “no” to me — even when the rules entitle me to some modest benefit. When I want an upgrade, UA tries their best to sell it to somebody else for a few dollars. Loyalty means nothing. And when I do get an upgrade, the lofty first class service usually consists of a single scone. As I tell friends and family, being a top elite at UA only means I get treated a little worse than everyone else. Does that seem like a recipe for a successful company?

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