"Sizing up United a matter of debate
CEO Tilton rejects suggestions for hefty trimming of its routes
By Susan Chandler
Tribune staff reporter
Published August 31, 2003
More than 1,800 pilots and 5,465 flight attendants on layoff. Capacity down by 24 percent since 9/11.
No question, United Airlines has become a dramatically smaller carrier.
But it may not have shrunk enough, some experts argue.
United has discontinued only 15 routes since seeking bankruptcy protection in December and added 12, which computes to a decrease of three.
The consequence of hanging on to its empire: a $431 million second-quarter operating loss that would have been far worse if United's employees weren't taking home substantially reduced paychecks.
To restructuring expert Michael Kayman, it means one thing: United needs to decide what business it is in and get out of routes that don't fit that model.
"United has to choose its customers," said Kayman, who counsels troubled companies from the Chicago office of Conway MacKenzie & Dunleavy, a Detroit-based restructuring firm.
If United is losing money flying to South America, where economies are weak and American Airlines is the dominant player, it should pull out altogether, he said. If it can't make a profit flying budget-conscious leisure travelers to Florida, United should say so long to the Sunshine State.
Kayman isn't the only one that thinks that. Some of the company's creditors and several of its competitors say the same thing.
Other carriers are undergoing more radical surgery.
American Airlines, which isn't in Chapter 11, is downsizing its St. Louis hub, cutting its flight schedule there in half and dropping non-stop service to 27 cities.
US Airways, which emerged in March from seven months of bankruptcy, has discontinued six mainline routes, including Baltimore/Los Angeles and LaGuardia/Tampa; closed operations in 13 cities served by its express carriers; and turned 19 mainline routes over to its express partners.
United says that kind of shrinkage isn't the answer.
Speaking in Hong Kong last week, United Chief Executive Glenn Tilton explained his rationale.
"One of our greatest assets is our global route network--getting our customers to 771 destinations in 133 countries with ease, efficiency and comfort," Tilton told members of the American Chamber of Commerce. "To business travelers, this network is essential."
If United were a retailer, Tilton's job would be much simpler. He could rank his stores from the most profitable to the least profitable and lop off the bottom 20 percent.
If that didn't push the chain into the black, he could go back and lop off some more. The repercussions would be relatively few. Closing a store in Nashville, for instance, wouldn't affect one in Chicago.
Of course, restructuring isn't really that simple in the retail business--just look at struggling Kmart Corp.--but it is more complicated for a network carrier, said John Pincavage, a financial adviser to airlines.
"You may look at a specific route where you're not making money, but it turns out that it's integral to the entire network," said Pincavage, who is based in Westport, Conn.
"If you're a hub-and-spoke carrier, every flight you drop eliminates the possible combinations of markets you can serve. You basically diminish the power of the hub."
For instance, dropping service to Florida cities or other medium-size markets such as Louisville/Chicago could potentially hurt traffic on major routes such as Chicago/Tokyo, he said.
That makes identifying unprofitable routes extremely complicated from a system perspective. Maybe one leg of a traveler's itinerary doesn't make money, but the other two do. If you pull out of the unprofitable market, maybe your passenger starts flying somebody else.
Because the cost of owning or leasing jets is fixed, it often makes sense for airlines to keep flying marginally profitable or unprofitable routes to bring in a little extra revenue, some airline executives say.
That's the problem, chide others. If everyone continues to fly unprofitable routes, the airline industry's overcapacity won't go away, and pricing power will continue to be weak. Although that's a boon for consumers, it doesn't help an industry that lost almost $19 billion in the past two years.
At United, its extensive global network is considered one of the company's "crown jewels," an essential asset that must be preserved for the airline to attract business travelers and return to profitability.
"You can't really judge a network on historical profitability when you have wars and SARS and bankruptcy effects in the numbers," Doug Hacker, United's executive vice president for strategy, said in an interview last week.
"We've said, `Let's focus on a future period when costs are in a steady state, revenue performance is at steady state, and use that as a sizing exercise for our network.' We believe analytically that this network preserved will be quite profitable in some future time frame."
Trotting out small lineup
Rather than cutting off routes, United has several other tools at its disposal, Hacker said.
It can deploy smaller jets on unprofitable routes, "down-gauging" its network, in industry parlance. Or it can turn that flying over to its regional partners, which have much lower wage costs. United has done that in 20 markets, including Chicago/Cedar Rapids, Iowa; Los Angeles/Tucson and Denver/Eugene, Ore.
As part of the new contracts between United and its pilots, United Express carriers Mesa Airlines and SkyWest Airlines soon will be flying 70-seat jets, larger aircraft than they were allowed under the previous contract.
Those jets could be used on lightly traveled routes of 300 miles or more where one of United's 120-seat Boeing 737-300s isn't cost-effective, consultants say, or on routes where discount competition is keeping United's revenue below its operating costs.
United also is forging ahead with plans for its own discount carrier, another way to stay in the game without giving up geographic reach. United still has not announced a date for the debut of the low-cost carrier, code-named Starfish, but it has said it initially is devoting only 40 aircraft to Starfish, less than a third of what it envisioned earlier this year.
Some cuts restored
No question, United has tightened its belt.
Its overall capacity declined 14 percent in the second quarter. A good chunk of that was related to flight cutbacks related to the Iraq war and the Asian outbreak of severe acute respiratory syndrome. But much of that capacity was added back by early June, after the war wound down and the SARS outbreak abated.
A better measure of United's downsizing is the 7.5 percent decrease in available seat miles flown during the first six months of the year. Although that may sound substantial, it is less than US Airways' 11.9 percent decrease and Delta Air Lines' 9.2 percent decline.
United continues to fly more routes than any of its competitors, according to data from the Bureau of Transportation Statistics in Washington. During the first five months of the year, United was flying 2,061 routes, compared with 1,869 for American and 1,473 for Delta.
All this talk about shrinking is headed in the wrong direction, says one airline consultant.
United should be focused on winning market share from its major rival, American Airlines. If it can do that, it won't have to worry about ceding routes to regional jets or low-cost carriers.
"United's service is outstanding right now. It isn't good. It's outstanding," said Michael Boyd, president of the Boyd Group in Evergreen, Colo.
"Remember, they're in Chicago, and two concourses over, American is boarding millions of passengers. Why not go after them? They should tell their employees, `Feel sorry for American because we're going to put them out of business.'"