As Airlines Pull Out of
Dive, United Charts Its Own Course
It Woos Business Travelers With Range of Services As Rivals Cut and Simplify
By SUSAN CAREY
Staff Reporter of THE WALL STREET JOURNAL
January 13, 2006; Page A1
Next month, United Airlines parent UAL Corp. expects to emerge from the largest, longest-running airline bankruptcy in history. In three years, the nation's second-largest airline has shaken up management, improved its on-time record and slashed costs by $7 billion a year.
Now United is gambling on a flight plan that takes it in the opposite direction of the rest of the U.S. industry. Determined not to be another clone of low-cost, low-fare juggernaut Southwest Airlines, United is making an all-out effort to raise revenue by pampering its best business travelers -- and keeping them on United whether they are flying to a meeting on the coast, or taking the family to Orlando. That means accepting higher costs, the very problem that drove it into bankruptcy in the first place.
In the face of rising fuel prices and continuing losses, competitors have cut back on frills and simplified their offerings across the board. United is keeping onboard blankets and pillows, making seating more spacious and designing new services for both the high and low ends of the market. The airline hopes these steps will allow it not only to charge more but to steal some customers from rivals, or, in the case of its new leisure division, Ted, to better compete with discounters.
One big risk: United is sticking with a seven-year-old program that rewards elite frequent fliers traveling in the front of the coach section with a few extra inches of legroom. The program, dubbed Economy Plus, has generated additional revenue, but it also has raised costs, because United now has fewer seats than rivals on most of its 450 jetliners. AMR Corp.'s American Airlines last year undid a similar program it launched in 2000, saying adding back seats generated an extra $100 million in annual revenue.
United has reduced the number of seats on more than 100 regional jets flying with its commuter affiliates so it could install roomier Economy Plus seating and first-class cabins -- the first time anyone in the industry has so broadly tried an upscale approach on such small jets. It radically cut the seating in a luxurious transcontinental service called "p.s." The extra room enables United to be the only airline that offers fully reclining, first-class seats on coast-to-coast flights. Now, following a big expansion of overseas routes, United also is planning a multimillion-dollar upgrade of its international first- and business-class cabins.
The U.S. airline industry is just starting to pull out of a five-year crisis in which it has lost an estimated $42 billion. Business travelers revolted against high prices, fuel prices rose precipitously, the Internet made cheap fares easier to find and low-cost discount airlines expanded rapidly. The major hub-and-spoke airlines were forced to match discount fares even though their costs were much higher. Four major airlines filed for bankruptcy-court protection and a fifth, American, barely avoided that fate.
The upshot: All the big carriers went on diets, slashing their operations and moving more airplanes onto international routes, where competition is less fierce. Now, with fuel prices moderating, some big carriers actually are expected to be profitable this year.
United's effort to offer a smorgasbord of services is a big risk at a time when simplicity in the name of shrinking costs is the industry mantra. Inside United, the strategy has sparked battles between the airline's cost-conscious financial executives and their counterparts in sales and marketing. Some debates have gone all the way to the board of directors.
Glenn Tilton, UAL's chairman and chief executive, repeatedly has sided with those who advocated add-ons, believing the extra costs are manageable because the additional revenue more than covers them. United executives argue that they have shed expenses in bankruptcy to such an extent that the airline is nearly comparable in efficiency with discount carriers. With its huge route network in the U.S. and overseas, it has the potential to capture upscale customers, lifting the company's top line. Once fuel prices come down, United believes it will be highly profitable once again.
"It doesn't take talent to take the pillows off" planes, says Mr. Tilton, a former oil-industry executive who has guided United since September 2002. "In the industry's herd mentality, we were supposed to trundle down the runway of commoditization," he says. "But if you're blessed with this network, to optimize it, you overlay an array of products that people want."
Most major airlines like American and Northwest Airlines are streamlining their offerings and stripping away perks. Northwest, which filed for bankruptcy-court protection in September, no longer serves free pretzels. American's Eagle commuter subsidiary is experimenting with charging $1 for a soda. Delta Air Lines, also in Chapter 11, is ditching its leisure division, Song. On the other hand, Continental Airlines has rejected the take-back of customer perks and still offers free meals and other amenities, but the nation's No. 5 airline isn't offering as many levels of service as United.
To rivals, United appears to be going back to the industry playbook of the go-go 1990s. United "believes, as we did 10 years ago, that the increased revenue from this level of complexity would more than offset the cost," says David Cush, an American vice president and general sales manager. "We're on a very different page today."
American, the nation's largest airline, has cut the types of airplanes in its fleet to six from 14, added seats back and eliminated pillows on domestic flights. Mr. Cush says the company is avoiding multiple brands and cabin configurations to present customers a consistent product.
But United is finding that more people are willing to pay $4,500 to fly first class on its new transcontinental p.s. offering, if they get top-notch service. That means personal DVD players, service carts decorated with fresh flowers and the fully reclining seats. Full-fare first-class ticket sales on the New York-San Francisco route are up 37% in p.s.'s first year, United says.
The Final Straw
Jack Lasersohn, a venture capitalist from New Canaan, Conn., is a convert. "For some people, it's either this or a private jet," he says.
An elite American frequent flier for two decades, he says he switched to United a couple of years ago because he got fed up with cost-cutting and service lapses at American. A trivial detail was the final straw: An American flight attendant in first class said she could offer only skim milk for his coffee. "No half-and-half in first class?" he says. "They lost a $100,000-a-year customer." (American's Mr. Cush says the company thought it could save money by dropping cream, but reversed that decision after passengers complained.)
United remains deeply in the red. It reported a net loss of $4.3 billion through the first nine months of 2005, although the airline's nearly $4 billion in noncash reorganization expenses made up the bulk of the deficit. The company says it'll break even this year if oil prices remain in the $60-a-barrel range; if they fall closer to $50, United says it will make a profit.
When it filed for bankruptcy in December 2002, United was suffering from a failed experiment with employee ownership that had left it with the highest-paid and least-productive workers in the industry. It had too many planes, antiquated business methods and a complacent corporate sales force.
In Chapter 11, the company was able to win two rounds of concessions from employees, shrink its fleet, lower its costs for everything from aircraft leases to airport gates, and dump its underfunded pension plans on Uncle Sam. UAL said yesterday that it has resolved all outstanding issues between itself and its unsecured creditors, taking it a step closer to emerging from bankruptcy protection.
United has also fixed its sloppy operations, which had long alienated customers, and within a year went from worst to first in punctuality compared with its largest peers. According to government data, it remains one of the better big U.S. airlines for on-time arrivals, fewest cancellations and least mishandled luggage.
With some of its moves, the company has been able to address more than one of its goals. Enhancing airport efficiency so planes spend less time on the ground saves money, but also allows planes to fly more each day and produce more revenue. That is one reason why United has been able to shrink its fleet while serving more cities and flying more routes than it did in 2002.
A year ago, United executives watched closely as American retreated from its ballyhooed "More Room Throughout Coach" program because it wasn't getting enough extra revenue to make up for the lost seats. Some United executives wondered whether the carrier should bag Economy Plus.
One was Jake Brace, United's chief financial officer. With fuel moving into the $50 range, he argued at a meeting of executives last February at the airline's suburban Chicago headquarters that the company needed to have more seats on its planes, not fewer, according to Mr. Tilton. Pete McDonald, the chief operating officer, agreed, saying United's planes were so full already that the airline was turning fliers away.
But John Tague, executive vice president of marketing, sales and revenue, argued that Economy Plus was crucial to United's effort to differentiate itself. Mr. McDonald challenged him to prove it, Mr. Tilton recalls, and Mr. Tague said that if the numbers didn't pan out, the carrier would drop Economy Plus.
The debate made its way to the board soon after. Directors backed Mr. Tague while insisting on periodic audits. They wanted to know whether Economy Plus was helping United win corporate accounts and bringing in fresh revenue from nonelite fliers willing to pay $40 or $50 to upgrade to roomier seats.
Economy Plus upgrade revenue doubled last year and now United expects it to double again to $50 million this year. That means the overall program will break even, United says, without even taking into account the clients it believes it would lose if it didn't offer added legroom. "It was sort of counterintuitive," says Jim O'Connor, a UAL director. But Economy Plus "is a real important additive to United's image...an attempt to pull us away from being just a commodity provider."
Similar Risks
United also broke with the industry by customizing Ted, its leisure-travel offering. The separately branded division, which started flying two years ago, involved similar risks and debates. While most carriers are standardizing their services, Ted lacks any first-class seats and packs in 18 more seats than normal for an Airbus A320. United hopes that people used to flying first class will be content with the Economy Plus seating at the front of the plane.
Today, the Ted division has 56 planes serving all five of United's domestic hubs, and is gaining market share, says Sean Donohue, the United vice president who leads Ted. It filled 84% of its seats in the 12 months ended Oct. 31, and accounts for 17% of United's domestic capacity. Over the same period, Ted delivered an operating profit with its costs fully allocated, he says, ending huge losses on some of the airline's busiest routes.
United's high-end transcontinental service, p.s., took some internal selling too. For years, United and American both offered three-class Boeing 767 flights between New York's Kennedy airport and Los Angeles and San Francisco, ferrying high-fare travelers in the financial and entertainment industries who like sitting up front. But United, while in bankruptcy, had the chance to dump gas-guzzling 767-300s and replace them with 757s. In bankruptcy, airlines can reject their aircraft leases and return planes to their owners without financial penalty.
Three-Class Planes
The smaller planes, however, posed problems for the spacious-cabin image United was trying to portray. Marty St. George, managing director of market planning, and his team decided the best approach was to remove 70 seats from the 757s and space out the remaining 110. That way United could offer three-class planes with lie-flat beds in first class, a sumptuous business class and a coach cabin with only the roomier Economy Plus seating.
"We had a lot of trepidation about it," Mr. St. George recalls. "No one had put three classes on a narrow-body plane" because the planes were considered too small for three different sections. When he presented the idea to senior management, response was tepid: " 'You guys are taking 70 seats off? Is that the right answer?' " he says he heard back.
Mr. O'Connor, the board member, recalling the back-and-forth, says, "We talk about complexity every time we look at reconfiguring an airplane. We want to know the cost but also the projected revenue. Does it make sense economically?"
In the end, the board committed to a multimillion-dollar refurbishment of 13 757s -- and pulled the 70 seats. After the first year, the flights are profitable because the smaller 757s are 14% cheaper to operate than the planes they replaced, and overall revenue per plane is up 1%. Demand is so great in the front cabins that United is considering adding more daily roundtrips on both routes.
United says its unit revenue -- the amount of revenue it collects for each seat flown a mile -- is growing faster than the industry. It's boosting its share of traffic and revenue in its hubs. Without reorganization items, UAL would have posted net profit of $68 million in the third quarter. And its passengers paid 11.4 cents to fly a mile, up from 10.5 cents a year earlier.
Still, fewer fliers overall are buying domestic premium fares -- first- and business-class and full economy tickets -- leaving some of United's new products chasing a shrinking audience. But United's chunk of revenue derived from these high-yielding tickets rose to 14% in the first half of 2005 from 12% the previous year, says Dan Kasper, head of the transportation practice at consultants LECG. If United can push that to around 15% to 20%, its strategy probably will pay off, he says.
It Woos Business Travelers With Range of Services As Rivals Cut and Simplify
By SUSAN CAREY
Staff Reporter of THE WALL STREET JOURNAL
January 13, 2006; Page A1
Next month, United Airlines parent UAL Corp. expects to emerge from the largest, longest-running airline bankruptcy in history. In three years, the nation's second-largest airline has shaken up management, improved its on-time record and slashed costs by $7 billion a year.
Now United is gambling on a flight plan that takes it in the opposite direction of the rest of the U.S. industry. Determined not to be another clone of low-cost, low-fare juggernaut Southwest Airlines, United is making an all-out effort to raise revenue by pampering its best business travelers -- and keeping them on United whether they are flying to a meeting on the coast, or taking the family to Orlando. That means accepting higher costs, the very problem that drove it into bankruptcy in the first place.
In the face of rising fuel prices and continuing losses, competitors have cut back on frills and simplified their offerings across the board. United is keeping onboard blankets and pillows, making seating more spacious and designing new services for both the high and low ends of the market. The airline hopes these steps will allow it not only to charge more but to steal some customers from rivals, or, in the case of its new leisure division, Ted, to better compete with discounters.
One big risk: United is sticking with a seven-year-old program that rewards elite frequent fliers traveling in the front of the coach section with a few extra inches of legroom. The program, dubbed Economy Plus, has generated additional revenue, but it also has raised costs, because United now has fewer seats than rivals on most of its 450 jetliners. AMR Corp.'s American Airlines last year undid a similar program it launched in 2000, saying adding back seats generated an extra $100 million in annual revenue.
United has reduced the number of seats on more than 100 regional jets flying with its commuter affiliates so it could install roomier Economy Plus seating and first-class cabins -- the first time anyone in the industry has so broadly tried an upscale approach on such small jets. It radically cut the seating in a luxurious transcontinental service called "p.s." The extra room enables United to be the only airline that offers fully reclining, first-class seats on coast-to-coast flights. Now, following a big expansion of overseas routes, United also is planning a multimillion-dollar upgrade of its international first- and business-class cabins.
The U.S. airline industry is just starting to pull out of a five-year crisis in which it has lost an estimated $42 billion. Business travelers revolted against high prices, fuel prices rose precipitously, the Internet made cheap fares easier to find and low-cost discount airlines expanded rapidly. The major hub-and-spoke airlines were forced to match discount fares even though their costs were much higher. Four major airlines filed for bankruptcy-court protection and a fifth, American, barely avoided that fate.
The upshot: All the big carriers went on diets, slashing their operations and moving more airplanes onto international routes, where competition is less fierce. Now, with fuel prices moderating, some big carriers actually are expected to be profitable this year.
United's effort to offer a smorgasbord of services is a big risk at a time when simplicity in the name of shrinking costs is the industry mantra. Inside United, the strategy has sparked battles between the airline's cost-conscious financial executives and their counterparts in sales and marketing. Some debates have gone all the way to the board of directors.
Glenn Tilton, UAL's chairman and chief executive, repeatedly has sided with those who advocated add-ons, believing the extra costs are manageable because the additional revenue more than covers them. United executives argue that they have shed expenses in bankruptcy to such an extent that the airline is nearly comparable in efficiency with discount carriers. With its huge route network in the U.S. and overseas, it has the potential to capture upscale customers, lifting the company's top line. Once fuel prices come down, United believes it will be highly profitable once again.
"It doesn't take talent to take the pillows off" planes, says Mr. Tilton, a former oil-industry executive who has guided United since September 2002. "In the industry's herd mentality, we were supposed to trundle down the runway of commoditization," he says. "But if you're blessed with this network, to optimize it, you overlay an array of products that people want."
Most major airlines like American and Northwest Airlines are streamlining their offerings and stripping away perks. Northwest, which filed for bankruptcy-court protection in September, no longer serves free pretzels. American's Eagle commuter subsidiary is experimenting with charging $1 for a soda. Delta Air Lines, also in Chapter 11, is ditching its leisure division, Song. On the other hand, Continental Airlines has rejected the take-back of customer perks and still offers free meals and other amenities, but the nation's No. 5 airline isn't offering as many levels of service as United.
To rivals, United appears to be going back to the industry playbook of the go-go 1990s. United "believes, as we did 10 years ago, that the increased revenue from this level of complexity would more than offset the cost," says David Cush, an American vice president and general sales manager. "We're on a very different page today."
American, the nation's largest airline, has cut the types of airplanes in its fleet to six from 14, added seats back and eliminated pillows on domestic flights. Mr. Cush says the company is avoiding multiple brands and cabin configurations to present customers a consistent product.
But United is finding that more people are willing to pay $4,500 to fly first class on its new transcontinental p.s. offering, if they get top-notch service. That means personal DVD players, service carts decorated with fresh flowers and the fully reclining seats. Full-fare first-class ticket sales on the New York-San Francisco route are up 37% in p.s.'s first year, United says.
The Final Straw
Jack Lasersohn, a venture capitalist from New Canaan, Conn., is a convert. "For some people, it's either this or a private jet," he says.
An elite American frequent flier for two decades, he says he switched to United a couple of years ago because he got fed up with cost-cutting and service lapses at American. A trivial detail was the final straw: An American flight attendant in first class said she could offer only skim milk for his coffee. "No half-and-half in first class?" he says. "They lost a $100,000-a-year customer." (American's Mr. Cush says the company thought it could save money by dropping cream, but reversed that decision after passengers complained.)
United remains deeply in the red. It reported a net loss of $4.3 billion through the first nine months of 2005, although the airline's nearly $4 billion in noncash reorganization expenses made up the bulk of the deficit. The company says it'll break even this year if oil prices remain in the $60-a-barrel range; if they fall closer to $50, United says it will make a profit.
When it filed for bankruptcy in December 2002, United was suffering from a failed experiment with employee ownership that had left it with the highest-paid and least-productive workers in the industry. It had too many planes, antiquated business methods and a complacent corporate sales force.
In Chapter 11, the company was able to win two rounds of concessions from employees, shrink its fleet, lower its costs for everything from aircraft leases to airport gates, and dump its underfunded pension plans on Uncle Sam. UAL said yesterday that it has resolved all outstanding issues between itself and its unsecured creditors, taking it a step closer to emerging from bankruptcy protection.
United has also fixed its sloppy operations, which had long alienated customers, and within a year went from worst to first in punctuality compared with its largest peers. According to government data, it remains one of the better big U.S. airlines for on-time arrivals, fewest cancellations and least mishandled luggage.
With some of its moves, the company has been able to address more than one of its goals. Enhancing airport efficiency so planes spend less time on the ground saves money, but also allows planes to fly more each day and produce more revenue. That is one reason why United has been able to shrink its fleet while serving more cities and flying more routes than it did in 2002.
A year ago, United executives watched closely as American retreated from its ballyhooed "More Room Throughout Coach" program because it wasn't getting enough extra revenue to make up for the lost seats. Some United executives wondered whether the carrier should bag Economy Plus.
One was Jake Brace, United's chief financial officer. With fuel moving into the $50 range, he argued at a meeting of executives last February at the airline's suburban Chicago headquarters that the company needed to have more seats on its planes, not fewer, according to Mr. Tilton. Pete McDonald, the chief operating officer, agreed, saying United's planes were so full already that the airline was turning fliers away.
But John Tague, executive vice president of marketing, sales and revenue, argued that Economy Plus was crucial to United's effort to differentiate itself. Mr. McDonald challenged him to prove it, Mr. Tilton recalls, and Mr. Tague said that if the numbers didn't pan out, the carrier would drop Economy Plus.
The debate made its way to the board soon after. Directors backed Mr. Tague while insisting on periodic audits. They wanted to know whether Economy Plus was helping United win corporate accounts and bringing in fresh revenue from nonelite fliers willing to pay $40 or $50 to upgrade to roomier seats.
Economy Plus upgrade revenue doubled last year and now United expects it to double again to $50 million this year. That means the overall program will break even, United says, without even taking into account the clients it believes it would lose if it didn't offer added legroom. "It was sort of counterintuitive," says Jim O'Connor, a UAL director. But Economy Plus "is a real important additive to United's image...an attempt to pull us away from being just a commodity provider."
Similar Risks
United also broke with the industry by customizing Ted, its leisure-travel offering. The separately branded division, which started flying two years ago, involved similar risks and debates. While most carriers are standardizing their services, Ted lacks any first-class seats and packs in 18 more seats than normal for an Airbus A320. United hopes that people used to flying first class will be content with the Economy Plus seating at the front of the plane.
Today, the Ted division has 56 planes serving all five of United's domestic hubs, and is gaining market share, says Sean Donohue, the United vice president who leads Ted. It filled 84% of its seats in the 12 months ended Oct. 31, and accounts for 17% of United's domestic capacity. Over the same period, Ted delivered an operating profit with its costs fully allocated, he says, ending huge losses on some of the airline's busiest routes.
United's high-end transcontinental service, p.s., took some internal selling too. For years, United and American both offered three-class Boeing 767 flights between New York's Kennedy airport and Los Angeles and San Francisco, ferrying high-fare travelers in the financial and entertainment industries who like sitting up front. But United, while in bankruptcy, had the chance to dump gas-guzzling 767-300s and replace them with 757s. In bankruptcy, airlines can reject their aircraft leases and return planes to their owners without financial penalty.
Three-Class Planes
The smaller planes, however, posed problems for the spacious-cabin image United was trying to portray. Marty St. George, managing director of market planning, and his team decided the best approach was to remove 70 seats from the 757s and space out the remaining 110. That way United could offer three-class planes with lie-flat beds in first class, a sumptuous business class and a coach cabin with only the roomier Economy Plus seating.
"We had a lot of trepidation about it," Mr. St. George recalls. "No one had put three classes on a narrow-body plane" because the planes were considered too small for three different sections. When he presented the idea to senior management, response was tepid: " 'You guys are taking 70 seats off? Is that the right answer?' " he says he heard back.
Mr. O'Connor, the board member, recalling the back-and-forth, says, "We talk about complexity every time we look at reconfiguring an airplane. We want to know the cost but also the projected revenue. Does it make sense economically?"
In the end, the board committed to a multimillion-dollar refurbishment of 13 757s -- and pulled the 70 seats. After the first year, the flights are profitable because the smaller 757s are 14% cheaper to operate than the planes they replaced, and overall revenue per plane is up 1%. Demand is so great in the front cabins that United is considering adding more daily roundtrips on both routes.
United says its unit revenue -- the amount of revenue it collects for each seat flown a mile -- is growing faster than the industry. It's boosting its share of traffic and revenue in its hubs. Without reorganization items, UAL would have posted net profit of $68 million in the third quarter. And its passengers paid 11.4 cents to fly a mile, up from 10.5 cents a year earlier.
Still, fewer fliers overall are buying domestic premium fares -- first- and business-class and full economy tickets -- leaving some of United's new products chasing a shrinking audience. But United's chunk of revenue derived from these high-yielding tickets rose to 14% in the first half of 2005 from 12% the previous year, says Dan Kasper, head of the transportation practice at consultants LECG. If United can push that to around 15% to 20%, its strategy probably will pay off, he says.