EWRflyr

United Airlines Shows How Not to Run a Business

By Shaun Rein

This commentary originally appeared in Forbes
As the world now knows, last year a guitarist named Dave Carroll was sitting in a window seat on a United Airlines (UAUA) plane at O'Hare airport in Chicago when he looked out and saw baggage handlers hurling guitar cases through the air. He pointed it out to flight attendants; they responded with indifference. When he arrived in Nebraska, he found that his instrument had been smashed. After months of complaining to the airline and getting no response, he wrote and performed a song, "United Breaks Guitars," and posted it on YouTube. It was viewed more than 3 million times in its first 10 days.


Across the world in China, Wang Jianshuo, a famed blogger, posted about a United flight he took to the U.S. A surly flight attendant refused to help an elderly passenger stow his carry-on luggage. The audio on the movie channels didn't work. The overhead lights turned off and on the entire trip. His return trip was worse: The plane sat on the tarmac for three hours and then was cancelled until the next day because of a fuel leak.


How does a company perform so badly? United's stock price was tottering even before the financial crisis. Now that even stellar airlines like Southwest are suffering, a weak player like United seems doomed to follow in General Motors' and Circuit City's footsteps unless it makes major changes.

This week, United announced a quarterly profit of $28 million, but that included fuel hedges and other accounting gains, without which it lost $323 million. It also named a new president. The airline's missteps over the past decade provide a case study of what not to do when running a company.
Here are three key lessons we all can learn from United.


Create Brand Loyalty, Not Simply Satisfaction
It is doubtful that the millions who have watched Carroll's video or read Wang's blog will want to fly United anytime soon, unless they have no choice. That is terrible for the airline. It is fighting for every last passenger dollar, and trying to make inroads into the emerging Chinese travel market. Part of the problem is that the company, like many, makes satisfying customers part of its mission statement but fails to go nearly far enough beyond that.


Winning companies like Apple (AAPL) go past mere satisfaction to try to create true brand loyalty. Not only do loyal customers spend more, they are more likely to become brand ambassadors and bring along other customers. When everyone from the mailroom to the chief executive buys into the mantra of creating brand loyalty, the result is increased profits.


Consumers are more price sensitive in this economy, and they are trading down, but it's still a great time to capture loyalty. People don't want to waste money on brands that fail to meet their expectations. They're buying only what they trust, and they'll return to trusted brands repeatedly.


Instead of watering down its frequent flyer benefits to save costs, United should be taking the exact opposite tack. It should take a page from hotel stalwarts like Starwood and Marriott, which are offering more goodies than before to their most loyal clients. In consumer studies that my organization, China Market Research Group has conducted, we've found that the No. 1 reason people fly United regularly is because they have racked up points in United's Star Alliance loyalty program. Why would United want to disenfranchise its most loyal customers?


As consumers think harder about where to spend their money, aiming to satisfy them is not enough. Only striving to create true loyalty will work.


Don't Forget Why You're Here
Many companies forget their main purpose and become bogged down in just sustaining their operations. United forgets that it's not only selling a means of transportation that is faster than trains or cars. For vacationers, who make up most passenger traffic, it's selling dreams and memories. An airline flight is typically the first and last part of a newlywed couple's honeymoon, or a family's overseas trip in planning for years.


People remember such journeys forever. I fondly recall my own first flight on TWA when I was six years old, to Italy and Greece with my parents. Likewise, my childhood flights on Delta to see my grandmother in Florida. What United fails to get is that it is selling dreams, not just a form of transportation. Few United employees take pride in their jobs, and it shows.


One company that gets it right is Disney (DIS). A trip to Disney World is not simply an outing to an amusement park like Six Flags (SIX) or Universal Studios. It is a time when families can create memories that last a lifetime. Disney trains its employees, from the monorail drivers to the people selling fast food, to be more than just salespeople. They are weavers of dreams. That is one reason families repeatedly return to Disney World, according to research my firm has conducted with visitors from eight different countries.


Unilever (UL) got it right with its Axe deodorant. That company understands that it is not selling a way to stop sweat or to smell a little better. It's selling a way for young men to be more attractive. Axe put together a TV commercial that shows a dorky guy, who happens to use Axe, getting more glances from attractive women than Ben Affleck, the movie star. The spot uses humor to imply that you, too, can be as appealing as the Hollywood star who dated Gwyneth Paltrow and Jennifer Lopez and is married to Jennifer Garner.


To create real customer loyalty, you have to offer more than just functionality. And you have to train everyone in your organization to have the pride to sell an emotional connection, not just tools.


Don't Forget Employee Morale
United's workers have been a beleaguered group for years now. They have had their wages, pensions and benefits cut even as the chief executive officer, Glenn F. Tilton, has been paid nearly $20 million over the last five years (despite United's stock dropping 43% during his tenure). Does that seem fair?


Employee morale has gone into the gutter. Unhappy workers mean terrible customer service--as Dave Carroll and Wang Jianshuo and millions of their followers know. The company may have no choice but to lay off workers and reduce benefits in the downturn, but it has to do so with respect and with effective communication to the rank and file about why such pain is necessary. Every company everywhere must have an effective strategy for ensuring that its remaining employees don't lose hope or happiness, just as it must maintain its focus on creating brand loyalty.


One thing to do is to make sure that all employees share the pain equally. If there are big cutbacks anywhere, senior management should take substantial pay reductions and limits on its privileges, such as fewer business class flights and trips on private jets. The troops look to senior management for direction. If those troops see the top brass caring for itself at the expense of others, the spirit of the entire organization erodes.


In today's economy you can't get by on decent prices or acceptable service. You have to stand out and win the hearts of your customers. To do that you have to go beyond satisfaction to true loyalty. You have to provide a compelling reason, beyond basic service and price, for consumers to choose you. And your organization must be unified in that mission. Otherwise, you may be the next to follow GM into Chapter 11.

FORTL

The truth is a b (female dog) itch sometimes.

Bond

Good luck trying to get Tilton to get the picture. I'm sure employee morale is the last thing he cares about...nothing like alienating your workforce to maximize productivity (Sarcasm).

StrikeTime

Although you are correct, I give 15 minutes before the TOS Police shut this one down.

UCLAbruins

Hey StrikeTime, I think I'd much rather have "the TOS police shut it down" than to see this forum turn into another Flight****, you know, that other site where they're always fighting and insulting eachother..

As far United, sad, just sad. They used to be our shining star, what happened there??

Bond

Easy, poor management and an MEC that thinks that being pro-active is proposing a national seniority list (as in "we already got screwed by management here, might as well go somewhere else and make everyone else pay for our managements mistakes!"). Yeah real bright those two groups have been, and it's been the United pilots that have paid the price.

skippy

want a stock tip-- when tilton announces his resignation- the stock will double! buy buy buy.

SKIPPY will be all in at that point

Bot999

Don't you recall Glenn's famous missive?.........."Your morale is not my problem." It made all Untied employees hunker down!!!!! Sad.

Bot

cactusmike

Replace the words United Airlines with US Airways in that article and the result would still be the truth.

Finance guys should not run companies involved in the service industry. Parker would make a good CFO. Tilton - I don't know where he belongs.

cactusmike

I think this says it all, and says it well:


July 22, 2009

TO: All United Pilots

FROM: UAL-MEC Communications

RE: Uniteds Second Quarter Results


Dear Fellow Pilots:

Yesterday, United Airlines released its June quarter results, and they show an airline struggling to recover from past mistakes and manage through a global recession. We have all read articles and analyst reports highlighting Uniteds struggles and even the potential risks of another bankruptcy filing. Your MEC and Council officers have heard from many of you directly about your concerns regarding the future of the airline and your job security. Though United Airlines, to many, appears to be at the edge of a financial cliff (as are many other U.S. carriers), there is much that can and is being done to prevent it from actually falling off that ledge.

Right now, Uniteds most pressing concerns are liquidity and compliance with the Companys financial covenants. As explained in a recent Straight and Level, there are two different triggers. The first is credit card holdbacks with American Express (AmEx) and JPMorgan Chase (JPM). The Straight and Level explains credit card holdbacks. Credit card cash holdbacks are based on Uniteds unrestricted cash balances each quarter. If unrestricted cash drops below $2.5 billion, then JPM may hold back up to 15% of Uniteds advance ticket sales processed by JPM. If unrestricted cash drops below $2.4 billion, then AmEx may holdback 15% of advance ticket sales processed by AmEx. If Uniteds unrestricted cash drops below $2.0 billion, then each credit card company may hold back 25% of advance ticket sales. The percentages increase as the unrestricted cash falls further below $2 billion. Given Uniteds current liquidity and large operating losses (when excluding non-cash hedge accounting gains), it is not difficult to envision a scenario where our two primary processors could, absent modification, require large amounts of cash collateral under the terms of the agreements.

There are also financial covenants associated with Uniteds bankruptcy exit financing. Uniteds fixed-charge coverage ratio test (again, as explained in the recent Straight and Level) measures adjusted EBITDAR against the sum of cash interest expense and aircraft operating rent expense. The required minimum ratios are different depending on the quarter. Additionally, there is a minimum unrestricted cash requirement of $1 billion. United was in compliance with all of its financing covenants at the end of the second quarter.

The interplay between credit card holdbacks and the minimum unrestricted cash covenant could cause a downward spiral. As more cash is held back by the credit card processors, unrestricted cash continues to fall and could trigger a covenant default under the exit financing credit facility. This could result in another United bankruptcy, or at a minimum, an expensive covenant waiver request. However, United ended the second quarter with $2.6 billion in unrestricted cash and with restricted cash of $281 million. And United has the ability to pledge collateral in lieu of cash with both JPM and AmEx (this ability is currently set to expire in January 2010 with JPM).

As United exits the busy summer travel season, it will start to burn some of the cash it has built up with advance ticket sales. Absent a quick recovery in revenues (which no one is expecting) United must raise additional financing or renegotiate its holdback provisions. United currently has $1.1 billion in unencumbered hard assets which it could pledge as collateral for more financing (how much can be raised and at what cost would be determined by the capital markets). Other options could include the sale of a stake of the Mileage Plus program, additional advance mile purchases by our credit card partners, the sale of the training center or maintenance bases, or even further equity offerings. These options, however, will eventually run out and we ultimately will need to generate profits and cash flow from operations. Does the MEC condone this burning of Uniteds furniture? Certainly not. Nonetheless, it is not over until it is over, so we must believe and act on the premise that United will prosper.

Lets address specifically Uniteds second quarter results. Bottom line result was a loss of $323 million excluding non-cash hedge gains and other charges. This was driven by several factors.
First, consolidated passenger revenues for the second quarter are down 25% from the same period last year, and passenger revenue per available seat mile (PRASM) was down 17%. This is a much greater decline than the 9% decline in consolidated ASMs for the quarter. Whats most disappointing about this result is that United has cut capacity further than its peers, yet its PRASM performance is not holding up better than the average. Year-to-date through June, industry PRASM as reported by the Air Transport Association is down approximately 12%, while Uniteds PRASM is down over 14%. The Company continues to tout its progress generating ancillary revenues (over $275 million in the second quarter), and while these efforts are helping, they arent enough to overcome the Companys continued focus on the premium passenger at the expense of those visiting friends and relatives. For now, Uniteds management has left the Company awaiting the return of the premium passenger.

Second, consolidated cost per available seat mile (CASM) excluding special items and non-cash fuel hedge gains was down nearly 16%. CASM excluding fuel and special items was down 0.2%, a fact which management has touted loudly to analysts, particularly given the significant capacity reductions. But to put this in context, year after year, both before and after bankruptcy, United has had among the highest unit costs in the industry, even though, post bankruptcy, its labor costs have been among the lowest in the industry. Until now, the Company has been able to offset its higher costs by having among the highest unit revenues in the industry. But with the recent dramatic decline in premium passengers, Uniteds historically high cost structure has left the Company playing catch up again. So while the published statistics are accurate about year-over-year cost containment, this result is possible because United had a lot of ground to make up. And our competitors have also done well containing costs with the end result that as of the second quarter, United's unit costs are expected to be higher than everyone except Continental and American when adjusted for the average length of flights.

It is important to emphasize that Uniteds current financial dilemma is not a reflection on the performance of the pilots and the employees of United Airlines. Simply stated, Uniteds management has overseen $902 million in losses for the first six months of this year, excluding non-cash hedge and other charges. That equates to $20,044 for each of Uniteds 45,000 full time employees in six months.

Early last month, we wrote a Focus on 5 that was sent to 14 of the most influential airline analysts. The report was well received and prompted calls to the Company. Lately, there have been newspaper articles asking the same question we have been posing for months: Why is Glenn Tilton still here? While other airlines have been operating in the same economic environment as United, why is United still in such a difficult financial position? Our Focus on 5 will help answer that question.

For more than a year, we have been sounding the alarm on our current CEOs inability to manage and secure a future for United Airlines (recall: prepayment of large amounts of debt at par in order to pay large dividends to common shareholders ; mismanagement of fuel hedge programs amidst a sharp spike in commodity prices, incurring losses of over $1 billion in part by aggressively expanding hedges at the top of the market with contracts that had significant downside exposure; over-paying for financial covenant relief relative to peers; failure to re-invest in the airline; failure to execute on a UA-CO merger in a common-sense and widely-anticipated parry to DL-NW; failure to effectively manage non-fuel unit costs; terrible customer satisfaction scores; ceding further territory to low-cost competitors; continued attempts to shrink to profitability; and failure to motivate employees in a service industry). Our initial warnings were met with skepticism by both outside readers and, frankly, by too many of our own pilots. The Company labeled our alarm a ploy to open contract talks early, without even once refuting the facts demonstrating the financial failings which we had brought to light. As recently as last month, we were criticized by some of our members for highlighting managements failures at a recent shareholder meeting because they said it conveyed the wrong message. Ladies and Gentlemen, this is the message: Glenn Tiltons inabilities are systematically taking this airline on a course that cannot be sustained.

Considering all of the sacrifices made by the employees upon exiting bankruptcy, a valid question is why are we in this position? The answer to that question is simple: Tilton and this management group in exiting bankruptcy were and are focused on one strategy a merger. All of their decisions were based on that with no attention to the operational side of the business. That management decision has put us where we are. The pilots and employees had no input into that decision and it has been the pilots who have repeatedly pointed out that if the operational side is taken care of, the rest will follow. Instead, United finds itself in a tight liquidity position awaiting the return of its core premium passenger.

Our competitors, however, continue to execute their plans. American Airlines CEO Gerard Arpey wrote to his employees last week:

As challenging as things are today, our task would be far more daunting had we not met so many challenges head on during the last several years. Moreover, I want to stress once again that our objective is not to simply endure the latest crisis. It is to make sure our airline is positioned to compete and win over the long haul. That's what our fleet renewal program is all about, and one of the important highlights of the second quarter was the deployment of the first wave of new 737s we will receive in the next two years. In addition to new planes, we are continuing to prudently invest to refurbish our aircraft interiors and airport facilities in a variety of ways.

Delta meanwhile has used the downturn in the economy to accelerate its integration with Northwest Airlines to capture an estimated $2 billion per year synergy. Uniteds senior management group has done nothing comparable because it lacks the vision, skill, ability and personality to guide this airline.

So, what can we do as individual pilots and employees? First, we will continue to negotiate our contract resolutely under the Railway Labor Act for our Section 6 negotiations. Second, read thoroughly the Focus on 5 article. If you are now truly convinced, as is your MEC, that Glenn Tilton is the root cause of Uniteds problems, then write to UALs Board of Directors and encourage others you know to do the same. Third, we will continue our flight operations in full compliance of the RLA and the court injunction. These quarterly results and our discussion of them come at a sensitive moment. As you know from recent communications, sick leave rates right now are high. If rates continue to be high, management will surely blame those rates on ALPA and, after-the-fact, point to this letter as a cause. Finally, be assured that your MEC is there for all of us and all of you, that they know where United is and where it is heading. You may feel like you are behind the cockpit door, not able to see much of what is being done in the cockpit, but your MEC and its leadership are not passengers in the back of the airplane. They are in the cockpit, fighting to keep this airplane upright and level, working on many avenues to secure the future of this airline. As specified in every United Flight Manual, Fly the Airplane, Silence the Warning, and Confirm the Emergency. Theyre doing exactly that.

In Unity