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United Airlines CEO Presents Go Forward Plan to Analysts

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United Airlines CEO Presents Go Forward Plan to Analysts

United Airlines CEO Presents Go Forward Plan to Analysts
June 22
12:00 2016

MIAMI — For the last five years, United Airlines has lagged its peers in the U.S. airline industry. The Chicago-based airline’s sub par performance has been comprehensive, encompassing passenger experience ratings, pre tax profit margins, and everything in between. Thus, despite financial performance that would be the envy of all but the world’s premier full-service airlines (and that even many low-cost carriers [LCCs] would kill for), United has evolved into a lemon for Wall Street and the broader aviation media.

With five years of disappointment as the backdrop then, United’s investor presentation yesterday was notable for finally signaling progress, or more precisely an aggressive strategy that would enable it to catch up to peer airlines. During an investor call led by CEO Oscar Munoz and Chief Revenue Officer Jim Compton, United’s executive team laid out plans to boost its bottom line profitability by $3.1 billion by 2018 (relative to 2015 figures). Included in the figures are $300 million from operational improvements, $1.5 billion in incremental revenue, and $1.3 billion from an improved cost structure.

United’s operations are finally getting an overhaul, but details are light


Ever since a fallacious summer back in 2012 driven by a short-sighted decision to stick with the SHARES reservation system, United’s operational reputation has been tainted in the eyes of passengers, particularly high yielding corporate customers. The reality is more mixed, as United has made several steps in the right direction over the last few years but still lags behind industry average on metrics such as on time performance (OTP) and completion factor (where it is consistently 7-8 percentage points behind Delta, which has had 100 days with 100% completion factor thus far in 2016). While a direct link is hard to prove, the shrinking and indeed reversal of the revenue premium for United over Delta despite the former’s more lucrative hubs is a pretty strong indicator that operational performance matters strongly to customers.

So it’s unassailable that United must improve its operation, and to its credit, the new management team appears to understand just how critical of a priority this is. The projected $300 million in benefits would accrue on both sides of the ledger, boosting revenue by re-attracting premium passengers and increasing utilization, which would also reduce costs along with reducing re-accomodations and reducing the cost of irregular operations. Undoubtedly, these benefits would accrue to United if its operations improved in concert, but the question of how these goals will be achieved is far from settled. Some of this is merely following Delta’s playbook and strategic prioritization, and there are some smart new investments such as deploying mobile tools for employees at the airport.

Conversely, the notion of reducing operational buffers (spares and padding of schedule) seems to be presented as a fact without necessarily laying out a clear road map for how it will be achieved. United’s hub structure inherently, with its concentration in congested (Newark, Chicago O’Hare, Los Angeles) or weather-affected (San Francisco) hubs, generates more operational challenges than those of American or Delta, and no amount of investment in the operation is going to solve for those extraneous constraints. But the broader fact that United has made operational improvement a strategic priority is definitely a step in the right direction.

Segmentation and bundled fares are low-hanging fruit


Overall this is smart, solid revenue generation strategy, and for once United is not merely following in Delta’s footsteps but rather pushing beyond into its own strategic initiatives. We do, however, have two minor concerns about these initiatives. First and foremost, we wonder at whether United will be able to keep the Economy Plus product competitive. While United was the first U.S. airline to build a premium economy cabin on shorter flights, Delta has pushed ahead in adding service perks (free drinks and snacks, better access to entertainment, etc.) that truly push the product ahead. United has an opportunity to do something truly radical (perhaps offering free WiFi to premium economy and First Class passengers), but at the very least it needs to do as much as Delta.

The second is more of a subtle concern, but basically we worry whether United will be able to articulate its segmented product offering correctly. Delta does a decent job of this, but JetBlue probably does it better, while United’s track record with its existing product line (let alone with expanded segmentation) is very mediocre. Poor articulation of the benefits of each higher segment would limit the revenue upside for United. But even with these top-line concerns, segmentation and bundling of fares and ancillary products feels like a low-hanging fruit for U.S. airlines in today’s environment, especially with improving consumer sentiment.

Cost benefits from fleet up-gauge


A consistent theme in almost every column and analysis written in this space about United over the past three years has been that the airline needed to get 50-seat regional jets out of its fleet and increase the proportion of larger mainline narrow body aircraft. Thankfully, beginning under Smisek and now under Munoz, United has finally started to eliminate the smallest regional jets en-masse and up-gauge its fleet. Along with the installment of slimline seats, which are uncomfortable but undoubtedly effective in driving down unit costs, United’s average seat per departure has touched 111 seats this year (it was well below 100 at the time of the merger) and will cascade to 121 by the end of 2018. Not surprisingly, this will drive an incremental $550 million in cost benefits (and $900 million over a 2013 baseline), and it’s nice to see the strategic no brainer that we and so many other analysts had been debated about for so long finally validated.

Beyond these major strategic pillars, there are smaller (though still important) revenue improvements ($300 million from further monetization of miles and $200 million from next generation revenue management), and cost savings (migration to single maintenance system and new tools and technology to enhance productivity like the mobile devices on the ground at the airport). The broader takeaway is that it is great to see United making the kinds of investments, both large and small, that it largely eschewed under the Smisek regime in favor of generating short term profits. And that extends to United’s overall plan. Munoz’s management team isn’t necessarily breaking new strategic ground but rather following a simple and proven playbook to close the gap with better performing peers. Relative to the previous five years, that must be music indeed to Wall Street’s ears.

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About Author

Vinay Bhaskara

Vinay Bhaskara

Senior Business Analyst, Big Airline Enthusiast, Avid Airport Connoisseur, Frequent Flyer, Globetrotter. I Miss Northwest Airlines Every Day. vinay@airwaysmag.com @TheABVinay

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1 Comment

  1. Dave Liesse
    Dave Liesse June 22, 13:35

    Rome wasn’t built in a day, and Oscar isn’t going to turn UA completely around in even a couple years. The two previous CEOs, in particular, both of whom were both anti-customer and anti-employee, did more to destroy the airline than the succession of out-of-industry “leaders” of the 70s, 80s, and 90s did. It didn’t help when after the merger the majority of competing systems — such as reservations, as noted in the article — were resolved in favor of former CO, not surprising since all but one member of upper management came from that airline.

    Incidentally, I’m not meaning to denigrate the former CO, which was a good airline back in the 80s and was again under Gordon Bethune. I never experienced them under his successor so know only of reputation, but aside from continuing free meals longer than any other airline my impression was that CO was also on a downward spiral, at least from the passenger’s standpoint. As I say, though, that is an impression not based on first-hand experience.

    Oscar, at least, seems to realize that — despite what many “experts” say — airline travel is NOT a commodity business. There are many passengers, myself included, who will pay more for value returned; there just needs to be a distinct improvement with each price level. In the past decade or so no one has wanted to pay for “first class” because it was anything but and the fare difference wasn’t justified. There are distinctly different market segments out there but, believe it or not, the customers aren’t idiots! I hope Oscar really does turn around this combination of two once-proud airlines and make the skies competitive once again.

    (No, I don’t work for United, although I did grow up in a UA family. I favor UA solely because they happen to fly where I want to go and because of on particular perk no other airline offers.)

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