This presentation did a fantastic job laying out the challenges in quantifiable form, but it is not clearly expressed just how they plan to make a $1 Billion dollar profit next year. The idea of the LCC - Why would one dedicate 30% of one's fleet to a market that by UA's own admission generates 4% of their revenue!?!? I could prattle on, but Michael Boyd said it best:
http://www.aviationplanning.com/asrc1.htm
Hot Flash - February 24, 2003
Part One: United: Relying On Whose Strategic Direction?
"Poor advice and unusual deals hastened Sabena's demise.
"FEW people who had anything to do with Sabena, a Belgian airline that went bust in November 2001, will enjoy a new report on the affair, published by Belgium's parliament on January 29th. For a start, the report hardly flatters McKinsey, the world's best-known management consultancy. Under de facto control by Swissair (which went bust in October 2001), Sabena brought in the Belgian arm of McKinsey, a favourite of Paul Reutlinger, then Sabena's Swiss boss. McKinsey recommended for Sabena the same high-risk strategy for growth that its Swiss arm had sold to Swissair. The report dryly concludes: 'This strategy...was as fatal to Swissair as it was to Sabena.'..."
- The Economist Magazine, February 6, 2003, Page 62
Indeed, is this the same McKinsey to which United is paying $1,000,000 a month, plus expenses, including $600,000 to develop new strategy? The same McKinsey, whose contract United's creditors have reportedly asked the judge to cancel, referring to the Swissair strategy debacle? The same United that's telling it's employees that it has a whole new strategy, but needs big concessions to make it work?
Say it ain't so.
Part Two: The Creditors' Presentation - More Strategic Questions Than Answers
By now, it's been circulated to more e-mail boxes than those annoying Viagra ads.
We're referring, of course, to United's 1/31 "Plan For Transformation" provided to to its creditors, a veritable Cecil B. DeMille production containing a whopping 270+ slides - truly the War And Peace of the PowerPoint set.
One could wonder if United's real "strategy" is trying to bore creditors to death. Dig the math: If they dragged these creditors into a room to view this thing, and spent just three minutes on each slide, it would run longer than the Sundance Film Festival. Like, it would be almost 14 hours of nonstop arrows, boxes, charts, and enough arcane, off-the-wall buzz-terms to choke a B-school library, all presented in a format more effective than barbiturates in putting people to sleep.
The presentation raised trendo-babble into the realm of an art form. Slides using terms like, "compelling customer value proposition" and "price driven occasionalist" came up repeatedly. Given how straight talk is eschewed by many these outside advisory firms, that's probably how they'd also describe negotiations in a Red Light district. Whatever, it all gives the impression that United's "Transformation Plan" may be more buzz than substantial.
Who Was The Real Audience? Nothing in the report was new. It droned on and on, mostly outlining all the things United management has discussed in the media. Things like: A low-cost internal airline. The theory that to survive United needed to look more like Southwest. More "regional" jets outsourced to small jet providers. All the things we've heard already. But that's not necessarily what comes across. Curiously, the whole thing seemed to have the flavor of United building a case to convince itself that that the plan would really, really work.
The Low Cost Carrier Issue - Hard Numbers For A Soft Concept. Over two months into Chapter 11, there's a lot of issues that United needs to clarify, and soon, regarding its strategic direction. First, outside of United's management, and the carrier's expensive outside advisors (like, maybe including those noted above,) there is, unfortunately, virtually nobody who gives much credibility to United's LCC concept. United's explanation of the need and the application of this as-yet un-named entity is mostly confused rambling supported by seemingly endless comparisons to Southwest. More concerning is the fact that the LCC really has no form, at least in the way UA has described it.
The idea seems to be that the LCC product - as yet undefined and undeveloped - will be injected into markets where a low fare carrier competes with United. But that indicates a strategy that is merely a reaction to competitive events. From that perspective, there'd ultimately be almost no United mainline out of Chicago on key high-density routes, because virtually all will be also operated by Southwest or ATA from Midway. So, the question becomes one of where does the LCC stop and mainline United begin? They don't seem to know. In fact, they seem to indicate that there is no line.
Fuzzy Math. Over the past six months, it is unfortunate that United's management has had a credibility problem with numbers. First, the ATSB found the data in the United loan-guarantee application to be unconvincing, and United's own data issued immediately after the ATSB rejection seemed to validate that conclusion. This perception isn't improved by the LCC concept outlined by United. They claim it'll have costs of 7.1 cents a mile - well under Southwest's 7.4 cent costs, and it claims it'll achieve this within a hub-and-spoke model. Aside from the fact it's hard to believe such numbers when even United admits it's not sure the exact size, scope, and structure of the LCC, it's pretty clear that the success of whole enchilada is dependent not operational efficiencies, but on slashing labor costs by as much as 40%, and maybe 50% below those of today. The message is that the strategy is based on making money almost solely by low labor rates.
So, What's The Alternative? United's management has a tough job ahead of it, and nobody is saying that the path to getting United out of this mess will be easy. But it's pretty clear - and widely agreed - that the current path isn't going anywhere positive. United's management may want to look to Continental and American - both losing money, but both are focused on building on their strengths, while cutting costs and pursuing new mainline operational efficiencies. (And, to be sure, getting labor participation, too.) There are enormous - and fixable - operational inefficiencies that still exist, many of which have been identified by various folks in United's rank and file.
One thing is certain. Implementing bad strategy will be lethal to United.
Just like it was for Sabena and Swissair.
Very true Guppy Puppy! those would be perfect.
