No matter what form UAL Corp.’s restructuring takes, United has a bevy of challenges that must be addressed before the nation’s second-largest carrier has the chance to fly high again.
Heading the list: improving employee morale and winning back passengers who have fled during the past six months as United’s fate has been held in the balance.
But longer term, United has to reinvent itself as a competitor, industry experts say, one that can hold its own against Southwest Airlines, the granddaddy of low-cost carriers, and more recent upstarts like JetBlue Airways.
That’s certainly not a new challenge. United tried to win back market share from Southwest with its low-cost Shuttle operation in the mid-1990s. But the Shuttle went the way of the buffalo after a few years, and United is still struggling to find a business model that fits its new, post-Sept. 11 circumstances.
Before such strategic issues can be tackled, though, United has to win back the confidence of the flying public.
“The first thing they have to do is calm the passenger herd,” says Michael Boyd, president of the Boyd Group, an aviation consulting firm in Evergreen, Colo. “Every other carrier will be out after their passenger base in full force.”
To ensure customer loyalty, United will have to undo some of the recent policies it has enacted in an attempt to boost revenue, Boyd says. For instance, United and other major carriers recently announced they will charge a $100 fee to passengers who stand by on an earlier flight, beginning in January, a move that was free before.
“Some of the things they’re doing are driving customers away,” Boyd added. “They have the employees and the route structure to be a highly competitive airline, but these management decisions put the airline at the opposite end from their own customers.”
On the plus side, many road warriors have a tangible reason to choose United again–big banks of frequent-flier miles that may be tied to everything from their First USA Visa card to their long-distance phone bill.
United acted to reinforce that tie Thursday by offering its frequent fliers double miles for every meal or hotel stay with its participating partners through Jan. 31. The airline also took out full-page ads in newspapers promising, “We’ll treat you like our future depends on it. It does.”
Employee loyalty and cooperation may be even harder to win back, workplace experts say.
Morale at the carrier could hardly be lower because, no matter what happens, everyone from airplane cleaners to flight dispatchers to pilots will soon be looking at smaller paychecks.
There’s also a double whammy.
Most United employees, except for its flight attendants, are shareholders through a 1994 employee-ownership plan in which employees traded pay cuts for equity. As United’s financial troubles have mounted, the value of those employee shares, which are held in a qualified retirement plan, has plummeted to 93 cents from a split-adjusted peak of about $101 a share in October 1997.
The morale situation is complicated further because employee groups are now mad at management and each other.
All the employees who agreed to the most recent round of proposed pay cuts, including pilots, flight attendants and gate agents, can easily point fingers at United’s 13,000 mechanics, who voted down a wage-cut proposal Nov. 27.
Even though the mechanics’ vote probably wasn’t the deciding factor in the Air Transportation Stabilization Board’s decision to turn down United’s request for a $1.8 billion loan guarantee, it certainly didn’t help the airline’s case. And the two events happened in close enough proximity that lots of United employees will connect the dots.
“There clearly will be fingerpointing, but there shouldn’t be,” said Wright B. George, who flew for Eastern Airlines before joining United 11 years ago. “Everybody has to sit down, recognize the problem and solve the problem. Everybody failed here.”
Respect essential
To restore morale, United’s management will have to show employees that they value the sacrifices the workers are making, said Aaron Gellman, professor at Northwestern University’s Transportation Center and the Kellogg School of Management.
Managers also will have to demonstrate respect for employees’ views and opinions. “They will have to give them a sense of working for common goals,” Gellman said.
Good luck, cynics, and even supporters, say.
United promised to bring workers into the decision-making process after employees bought 55 percent of United’s stock through an employee stock ownership plan.
The cooperative approach lasted for a few years. Dozens of employee task forces were created to find ways to cut costs and improve efficiency in everything from fuel consumption to cash management.
But after some promising progress, the task forces fell into disuse and United went back to operating the old way, says Corey Rosen, executive director of the National Center for Employee Ownership in Oakland, Calif.
“Management always says `People are our most important asset,’ but very few CEOs and managers act that way,” Rosen said. “The unions certainly share in part of that blame. It’s hard for union leaders to cooperate because they’re so used to being adversarial.”
Despite the obstacles, persuading United’s employees to pull together won’t be impossible, some say, because this time around, the carrier’s survival is at stake.
“Can we all get together and pull on the same oar?” George said. “I think we can do that–absolutely.”
Others are more skeptical.
“Glenn Tilton’s biggest problem is maintaining labor peace. If there’s any labor unrest, United becomes the next Eastern airlines and 90,000 people will lose their jobs,” warns Darryl Jenkins, director of the Aviation Institute at George Washington University.
“Two years from now, they can be stronger than they have ever been. Or they can be out of business,” Jenkins said.
Cost adjustments key
If United is to thrive again, one thing is certain. It must find a business model that allows it to make money and maintain its market share, aviation consultants say.
That will involve bringing its operating costs in line with the new diminished revenue environment and getting huge amounts of debt off its balance sheet.
“It’s really the cost side where the action is,” Northwestern’s Gellman says.
Even with the proposed wage cuts that most employees had agreed to, United’s costs would still be among the highest in the industry, experts note.
But United’s wage rates would be only a few percentage points higher than those of American Airlines, its closest competitor among so-called network carriers.
United’s costs will never be as low as Southwest’s, they add, because carriers with large hubs and international routes have higher expenses, including operating different types of aircraft and providing real meals to travelers, among others.
“Their employee wage rates weren’t way out of line,” argues Boyd. “That comes from Southwest, which can’t get you to Tokyo or Lincoln, Neb.”
But cost-cutting will have to go far beyond employees’ paychecks, they add. More money-losing flights will have to be cut. Some union work rules will likely go by the board.
And workers will have to be used more efficiently. And that means tinkering with United’s hub-and-spoke system, in which waves of flights arrive at a hub like O’Hare International Airport at roughly the same time, allowing passengers to make a variety of connections.
Hubbub over hub system
The hub-and-spoke system has been widely blamed for the gridlock that often develops when flights are delayed by weather or other reasons in one part of the country. But it is also very inefficient, says Gellman, because it requires large numbers of ground workers to service arriving and departing flights simultaneously.
American Airlines is experimenting with a different pattern, which has been dubbed “continuous hubbing” or the “rolling hub.” United should follow its example, he says.
In this new model, inbound flights arrive at staggered times, allowing ground crews to move from one flight to another. It may increase waiting time for some passengers, but that’s a small price to pay considering the potential savings, experts say.
Hardly anyone is seriously suggesting that United dump its hub-and-spoke system.
“We need hub and spoke. It consolidates people on thin routes,” says Steven Morrison, economist with Northeastern University in Boston. “So that isn’t broken.”
Don’t worry, United says, we’ll figure it out.
“We’re doing everything to restructure United so we are not only a viable but competitive airline, one that is in a position to operate profitably and grow over time,” said United spokesman Joe Hopkins. “We’re making it very clear that whether a restructuring is within the courts or outside, we will continue to fly and meet our customers’ needs.”
