This was written by a former United CFO:
The State Of United
March 25, 2003
Wall Street Journal
By Michael J. Riley
With fears of domestic terrorism on the rise again, U.S. airlines are reeling from declining sales as passengers postpone optional travel. Over the past year, United Airlines has been among the hardest hit. But its dual strategy of slashing labor costs and creating a new discount airline within itself as a way to emerge from bankruptcy won't make it the viable entity needed to compete in today's uncertain travel market.
After filing for bankruptcy protection in December and losing $3.2 billion in 2002, United wants to save $2.6 billion a year by chopping back drastically on pay and benefits for pilots, flight attendants and mechanics. It is asking a federal bankruptcy judge to void its labor contracts unless workers agree to the deep cuts on top of big ones given voluntarily in January. United also wants to create a low-cost carrier to compete with successful discount airlines, something it has tried and failed before.
I served as chief financial officer of United in 1985 and 1986 and have been following it and the other airlines ever since. For the past 16 years, United's management has focused almost exclusively on reducing wages while all other elements of a reasonable business strategy were ignored. To be sure, United's labor costs, at nearly 50% of its revenues in 2002, are high and cutting them is necessary for survival. But the single-minded focus on that goal is myopic -- and doomed.
Service-providing companies succeed through fair pricing, wise capital spending, customer satisfaction, good employee morale and convenience. In short, they build and maintain a brand. United and many other of the major financially troubled air carriers have cheapened their brands over the years.
A large part of the problem is pricing -- United's marketing consists of a bewildering arrangement of fare changes akin to the experience of buying a used car in the 1980s -- United's prices are both too high and too low. Last summer, I needed to go from Washington, D.C., to southern Maine. With two days notice, I could fly United from Dulles airport to Portland for $1,750 or Southwest Airlines from Baltimore, Md., to Manchester, N.H., for $150. It was worth an extra half-hour or so at each end to save $1,600.
In addition, at successful and much-admired Southwest it is easy to step up to a full fare, refundable ticket. It typically costs no more than 50% extra. At United, it may cost six times more. One secret to business success is to get customers to step up from the lowest price offering and happily pay a bit more for better value. No such option exists at United.
Even so, United's passenger revenue per mile was below Southwest's in 2001, despite the fact that United filled more seats than Southwest. That is because United also often discounts what was once a premium service to the point where it loses money. In 2000, before Sept. 11 and recession, UAL had net income so small that it was essentially zero. With such pricing practices, United's management remains its own worst enemy.
Even if all wages and benefits had been cut 40%, United still would have had losses in 2002. It is true, of course, that United has a problem with high wage costs as a percentage of revenue. Yet, a captain on a 737 at Southwest makes more money than a captain on a 737 at United. Southwest pilots volunteer for overtime, have a stock plan that is worth something, and feel they are on a winning team.
Ease in booking flights, a feeling of fair-price treatment, adequate staff at check-in, reasonable and truthful communication about delays and consistent service from employees who care all lead to customer satisfaction. Low-cost carriers Southwest, JetBlue Airways and AirTran Airways have that figured that out. Why can't United and the other troubled airlines?
Creating a new cheap airline within an airline would be the death of United. It is a Kmart approach to fighting Wal-Mart. United isn't likely to catch up with the discounters. People will pay for comfort, service and convenience. United needs a strategy that charges fair prices for a good brand.
It is hard to tell if it is too late to save United and the other big troubled airlines. Customers need reasons to pay more for tickets than at JetBlue or Southwest. The paying-for-value concept must be re-established and consumer trust must be earned anew. United needs to build a brand that can command a price premium. And United and the others need to realize that wages are only part of the problem.
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Mr. Riley, head of Riley Associates LLC and an adjunct professor at George Mason University, is the former chief financial officer of United Airlines.
