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Ted discovers success
By: Vik Krishnan & Vinayak Naik, WG'06 & WG'07
Issue date: 1/30/06
Section: News
How can an airline that charges for on-board food, offers beverages in measured quantities, and has a funny name be a success story?
Apparently, when your only choices are either to sink like Independence Air or book a permanent berth in bankruptcy court like US Airways, you start questioning the fundamental way you do business and improve your game. Of course, if you have a team of battle-hardened industry veterans supported by top notch Wharton-grade consultants, your odds are perhaps better than most. The fact that you are part of an industry colossus like United had its advantages too: established route structures, excellent aircraft maintenance facilities, and above all, easier brand association.
This is precisely how the story of Ted, the low cost carrier (LCC) within United Airlines, was described by Sean Donohue, the head of Ted and United Express; Allen Will, Director of Finance at Ted; and Andrew Watterson, Director of Mercer Management Consulting\'s Aviation Aerospace and Defense Practice.
The basic premise was simple: utilize just one aircraft type (Airbus A320), concentrate on leisure traveler dominated routes eliminate costly frills like food, increase capacity by replacing the first class cabin (usually filled by customers redeeming frequent flyer miles or upgrading from cheap fares anyway) with Premium Economy, and what do you get? PROFITS!
However, the path to profits was far from easy. From negotiations with possibly the strongest union in America, the Airline Pilots Association (ALPA), to rationalizing the Byzantine fare structure, to attempting to change the in-flight customer service, several key changes were necessary.
Enter Mercer Management Consulting with its team that included Wharton\'s own Vik Krishnan (WG\'06) and Matt Chou (WG\'07). For six months, this team of consultants helped Ted define specific attributes of the product offering, pricing structure, distribution strategy, marketing plan, and even the on-board seating configuration. Who knew that launching a new airline involved establishing guidelines for the amount of beverage a customer would be served, or developing an in-flight safety video that took safety seriously, but at the same time communicated the airline\'s relaxed brand image?
A creative agency also helped Ted develop a teaser campaign in the launch city, Denver, in which Ted performed \'random acts of kindness\' like paying for people\'s coffee at Starbucks, buying fans hot dogs at Denver Broncos football games, and even carving out the letters "T-e-d" in a crop circle in an unsuspecting farmer\'s corn field. The campaign, which cost less than $100,000 and won the prestigious 2005 EFFIE award for Integrated Marketing Communications, and received significant local and even national media attention. A lot of people wanted to know: "Who\'s Ted?"
Since Ted\'s February 2004 launch in Denver in the airline has expanded to United\'s other main hubs at Chicago O\'Hare and Washington-Dulles, has added aircrafts, and is now flying to Mexico and the Caribbean. In contrast to much of the industry, Ted broke even in 2005, even with elevated fuel prices.
While United\'s emergence from Chapter 11 restructuring this week is a positive development, the future of Ted is far from rosy. Several new challenges present themselves. The launch of Sir Richard Branson\'s Virgin America in the next year or so is a potent threat that could change the economics of the LCC industry in America. The industry veteran, Southwest, has declared open war in Ted\'s home turf of Denver. Add to that high fuel prices and the inherent challenges of changing company culture, and you have a horizon that becomes increasingly cloudy. However, Ted seems to be bracing itself for these renewed challenges. Tighter control on costs, quicker aircraft turnarounds - through the pioneering use of dual-end jet bridges to facilitate boarding and deplaning of passengers from both ends of the aircraft - and possibly fuel hedges, are some of the action items that Ted is working on.
The future of the U.S. aviation market, according to Ted, is a system of three to four legacy carriers with international routes complementing their domestic hub-and-spoke systems, and two to three LCCs providing point-to-point services for the budget traveler. With the backing of a stronger United, and a favorable reputation in the leisure market, Ted may very well be the first-of-a-kind success story of a legacy carrier\'s LCC unit surviving and thriving in this brutal industry.
How can an airline that charges for on-board food, offers beverages in measured quantities, and has a funny name be a success story?
Apparently, when your only choices are either to sink like Independence Air or book a permanent berth in bankruptcy court like US Airways, you start questioning the fundamental way you do business and improve your game. Of course, if you have a team of battle-hardened industry veterans supported by top notch Wharton-grade consultants, your odds are perhaps better than most. The fact that you are part of an industry colossus like United had its advantages too: established route structures, excellent aircraft maintenance facilities, and above all, easier brand association.
Ted started as an experiment within United two years ago. Its quirky name is derived from the last three letters of UniTED, and Sean was the first to admit that he originally believed that the name was the product of someone's wicked sense of humor. However, the name grew on the airline's management team, and United's employees have embraced their 'little sibling,' and view Ted as an opportunity for them to have fun at a time when very few legacy airline employees have much to celebrate.
The basic premise was simple: utilize just one aircraft type (Airbus A320), concentrate on leisure traveler dominated routes eliminate costly frills like food, increase capacity by replacing the first class cabin (usually filled by customers redeeming frequent flyer miles or upgrading from cheap fares anyway) with Premium Economy, and what do you get? PROFITS!
However, the path to profits was far from easy. From negotiations with possibly the strongest union in America, the Airline Pilots Association (ALPA), to rationalizing the Byzantine fare structure, to attempting to change the in-flight customer service, several key changes were necessary.
Enter Mercer Management Consulting with its team that included Wharton's own Vik Krishnan (WG'06) and Matt Chou (WG'07). For six months, this team of consultants helped Ted define specific attributes of the product offering, pricing structure, distribution strategy, marketing plan, and even the on-board seating configuration. Who knew that launching a new airline involved establishing guidelines for the amount of beverage a customer would be served, or developing an in-flight safety video that took safety seriously, but at the same time communicated the airline's relaxed brand image?
A creative agency also helped Ted develop a teaser campaign in the launch city, Denver, in which Ted performed 'random acts of kindness' like paying for people's coffee at Starbucks, buying fans hot dogs at Denver Broncos football games, and even carving out the letters "T-e-d" in a crop circle in an unsuspecting farmer's corn field. The campaign, which cost less than $100,000 and won the prestigious 2005 EFFIE award for Integrated Marketing Communications, and received significant local and even national media attention. A lot of people wanted to know: "Who's Ted?"
Since Ted's February 2004 launch in Denver in the airline has expanded to United's other main hubs at Chicago O'Hare and Washington-Dulles, has added aircrafts, and is now flying to Mexico and the Caribbean. In contrast to much of the industry, Ted broke even in 2005, even with elevated fuel prices.
While United's emergence from Chapter 11 restructuring this week is a positive development, the future of Ted is far from rosy. Several new challenges present themselves. The launch of Sir Richard Branson's Virgin America in the next year or so is a potent threat that could change the economics of the LCC industry in America. The industry veteran, Southwest, has declared open war in Ted's home turf of Denver. Add to that high fuel prices and the inherent challenges of changing company culture, and you have a horizon that becomes increasingly cloudy. However, Ted seems to be bracing itself for these renewed challenges. Tighter control on costs, quicker aircraft turnarounds - through the pioneering use of dual-end jet bridges to facilitate boarding and deplaning of passengers from both ends of the aircraft - and possibly fuel hedges, are some of the action items that Ted is working on.
The future of the U.S. aviation market, according to Ted, is a system of three to four legacy carriers with international routes complementing their domestic hub-and-spoke systems, and two to three LCCs providing point-to-point services for the budget traveler. With the backing of a stronger United, and a favorable reputation in the leisure market, Ted may very well be the first-of-a-kind success story of a legacy carrier's LCC unit surviving and thriving in this brutal industry.
TC
