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EXCLUSIVE. "A United Divided, Cannot Fly"

Thu Jun 21, 2001 11:18 pm

Excerpt from Holly Hegeman's Plane Business Banter of 6/20/2001

United Airlines: The Airline Needs To Put an End to the Distractions

I was talking to one of our institutional investor subscribers on
Monday‹primarily about Frontier Airlines‹when the subject of United Airlines
came up. Specifically, he asked me what my take was on the news that the
airline had committed to purchasing 40 Falcon jets from Dassault Aviation,
apparently determined to forge ahead with plans to create a new corporate
fractional business jet unit of the airline.

My take? Let me put it this way. Like a couple locked in a dysfunctional
marriage, rather than work on solving the unpleasant issues at home, it
appears United has chosen to go buy the house in the transitional
neighborhood that needs tons of renovation work.

In other words, instead of fixing the issues staring at them in the face,
what they have done is avoided the issues at home and created yet another

In more and more of my talks with institutional investors, the issue of
United, and just what the heck is happening to the airline takes center
stage. I mean, let's get one thing straight. Sure, American is dropping
serious bucks this quarter, as well as Delta Air Lines, not to mention many

But the problems at United are not just related to the downturn in the

Rather, the problems at United are ones which started before the
negotiations between the pilots and the airline got heated, and which then
continued with the announcement of the proposed deal for US Airways.

Talk to any senior level manager at United these days and you hear the same
refrain. The company is walking on egg shells. Too much time and effort has
been wasted on the proposed US Airways deal. A deal, which I remind readers
has, from the start been orchestrated more by US Airways, and its Chairman
Stephen Wolf, then by United and its CEO Jim Goodwin.

Think back to the original press conference. Stephen Wolf was the one who
came across as polished and in control.

Stephen Wolf was the one who cobbled together the boneheaded, and rather
self-serving concept of DC Air. A transparent creation that has, from the
beginning smelled worse than two-week old cheese.

Meanwhile, United then proceeded to give the store away to its pilots. But
not before a crippling work slowdown.

As we wrote here at the time the proposed contract was up for ratification,
one of United's ALPA MEC members wrote me and simply said, "Can the airline
afford to do this?"

That note still resonates.

Meanwhile, at the airline, it appears that all progress that had been made
up until this point stopped. All energies were now geared towards the
proposed merger.

But again, US Airways held more control over the deal than United.

Stephen Wolf went to Capitol Hill and cried poor mouth. Said that Congress
needed to approve the merger because it had no choice. US Airways was not
sustainable in its current form.

Only one problem with this argument.

While longer term, anyone with a brain can look at what is happening to the
US Airways' business plan and see there is no future with this strategy, the
problem is that in the short-term, the airline is not tottering on the verge
of bankruptcy. The airline is losing money, but so is most every other major
airline. And US Airways has no small amount of cash at its disposal.

Which brings us to the next question. If the deal does not go through as now
structured (and I think this is probably a foregone conclusion), the options

1) Wolf sells parts of the airline off to various bidders

2) Wolf leaves the airline, leaving the board to come up with its own

3) The deal between United and US Airways is severely gutted‹leaving US
Airways a much smaller airline, and giving United only a small portion of
what was originally negotiated.

>From United's standpoint, the absolute worst thing that could happen at this
point in time is if for some reason the Justice Department came back and
approved the deal.

At $60 a share, and given the total internal meltdown that has occurred at
United in the meantime, this financial limb, I feel, would leave United far
too vulnerable.

Meanwhile, while all the sound and fury of late has tended to concentrate on
the erosion that is evident in the high-yield segment of United's stable,
Howard Miller, independent researcher and PlaneBusiness Banter subscriber,
took a look this past week at the effect of the last two years on market
shares for Shuttle by United. In addition, he compared market shares of the
two operations for a period of time prior to 1st Quarter of 2000.

What he found was not very positive. In other words, not only has United
suffered loss of market share since the problems erupted at the airline last
spring, but even before that, there were problems.

For example, on the Las Vegas to Los Angeles route, United saw its market
share decrease from 16.74 in the fourth quarter of 1998, to 10.56 for the
fourth quarter of 2000.

On the Los Angeles to Sacramento route, the airline saw its market share
decrease from 49.74% in the fourth quarter of 1998 to only 36.75% in the
fourth quarter of 2000.

On the Los Angeles-Tucson route, United fared better, as the Shuttle market
share when from 32.8% in the fourth quarter of 1998 to 31.4% in the fourth
quarter of 2000.

But on the San Diego-San Francisco route, the airline saw its market share
drop from 59% to 47% for the same period.

Conversely, Southwest saw its Las Vegas to Los Angeles market share increase
from the fourth quarter of 1998 to the fourth quarter of 2000, by a margin
of 46.5% to 47%. We might also add that National Airlines was also added to
this market.

On the Los Angeles-Sacramento routes, United was down substantially, while
Southwest saw its market share increase substantially. Southwest saw its
market share increase from 48% in the fourth quarter of 1998 to 62% in the
fourth quarter of 2000.

On the Los Angeles-Tucson route, Southwest saw its market share increase a
bit from 60.7% to 63% for the same time period, while from San Diego to San
Francisco, Southwest saw its market share increase from 37.8% to 49.6% over
the same period of time. (We note that Southwest withdrew from the San
Francisco market in March of 2001.)

I guess my point today is this. Almost two years ago, when I visited the
executive ranks of United, I came away impressed. This is not to say there
did not seem to be some inconsistencies in the strategies and the messages
being stated by those at the top‹but overall, the airline at that point in
time was sitting very well‹all things considered.

Just two years later, the tables have turned.

My concerns from a financial standpoint are simple. Without exception, every
higher-level manager we talk to at the airline is concerned. They are
worried that between the perception of the pilots' contract and the US
Airways' debacle, that there is little or no respect for the management
leadership now in place. There is an element of serious distraction. There
is confusion. The feeling, without exception, is that there is little
respect for those in charge at this point in time. The mess starts at the
top and goes downward.

In short, the airline has a very serious leadership problem. The employees
have little faith in the airline's management, and the airline's operational
statistics continue to disappoint, which means that passengers have very
little to be excited over either.

Is the new fractional business jet program the answer?

Now what do you think?

No, the answer is a major overhaul and refocus of the airline. And yes,
while I have to say that CEO Jim Goodwin is one of my favorite people to
talk with, as human beings go, I am afraid that he has lost the backing of
his employees and his senior management team.

It is time for Goodwin to leave. The airline is in serious need of a strong
operationally talented individual. Greg Brenneman? He would be an excellent
choice, as would Gordon Bethune. But I have a feeling Gordon is having way
too much fun in Houston.

Then again.

Goodwin has now blinked twice. Once to Stephen Wolf, who then ran with the
proposed deal and controlled it. And to the pilots....ditto.

Or would that be Ditto Dutta, as the recent signs carried by picketing
United employees said?

Not sure.

What I am sure about is that the airline has to quit being in denial about
the issues it is now facing. The airline has to become focused, and it has
to bring in someone at the top who commands the respect and the cooperation
of those under him.

Finally, if you are a United shareholder or an employee, as I said, the
worst thing that could possibly happen at this point in time would be if the
Justice Department were to suddenly give the thumbs up to the original deal.
That would be your worst nightmare.

As a result of the current situation we see at United, the situation we used
to see at United, and the apparent lack of leadership that is perceived at
the airline by both investors and employees alike, we feel that a
conditional placement on the PlaneBusiness Titanic Watch is prudent. I see
no constructive movement towards a plan that tells me the company has its
act together. I see no respite for shareholders. I see no light at the end
of the O'Hare concourse.

Do I think the airline is on the brink of bankruptcy? No. Far from it. But,
if the airline doesn't establish a recovery plan‹a strong strategic plan to
get itself back on track‹the airline could be looking at years of losses.
Losses that yes, are partly a result of a failing US economy, but more so in
this case, on a management team that has no overall game plan and has spread
the resources of the airline much, much too thin.

For any of you who might be interested in perusing the spreadsheet that
Howard prepared for this story, we will post it on the PlaneBusiness website
this week after a few additional tweaks have been made. Look for the link
for this spreadsheet in next week's issue.

* * *

Posts: 3985
Joined: Fri Apr 21, 2000 5:03 am


Fri Jun 22, 2001 12:09 am

Excellent article, Hegeman sums up in one place many things folks here have said at the forum, and adds more. The numbers regarding United Shuttle are especially intriguing, and from UA's standpoint disturbing.

Probably Goodwin's worst mistake was caving to the pilots last summer, because that mistake will cost the whole industry. The Six Families cannot afford to pay for through-the-roof employee settlements, now or in the long term. Goodwin should have shut the whole airline down rather than subject pax to pilot schedule terrorism, and driven home the point that pre-mid 1990's pay levels are *not* coming back. That's how important that battle was. The unpleasant truth is that the "concessionary contracts" were a structural deregulation-related compensation adjustment, not simply a concession for the time.

This is where the merger proposal was especially catastrophic, because Goodwin obviously could not afford the PR disaster of a strike while trying to get the anticonsumer deal from hell approved against (to him) surprisingly vehement political opposition. You should have dropped the merger right then and faced down ALPA, Jimmy boy.

Now the airline and employees will have to go through the process of the market correcting overcompensation again. It would have been much easier for all involved had Goodwin not blinked in the first place, but rest assured the market will have the final word. Southwest and other poopers of the Six Families' high-cost, high-fare party, ain't going away. As Shuttle By United's performance indicates.

Whoever takes over the helm from Goodwin, presuming folks on the board wake up from their siesta and send him packing, has a dark valley to traverse. A great airline with a proud history, its shareholders and employees, deserve no less than the best...let's hope the board finds someone up to the job.


Need a new airline paint scheme? Better call Saul! (Bass that is)
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RE: EXCLUSIVE. "A United Divided, Cannot Fly"

Fri Jun 22, 2001 12:27 am

Great article, hits veery point. I have never understood why they are going into the fractionals. It'll take years at least , if ever, to see any return. In the mean time it'll take valuable resources away from UAL. I fhtye invested a small portion of what they have put into buying 100 Gulfstreams and Falcons, they could make a substantial change in their recent performasnce. Get some of the busniess travlers back that they lost do to the slow down last summer or their declining service. Most of all they need a new CEO. That needs to chaneg immediately, hopefully he can get out of this merger mentality and this fractional nonsense and then concentrate on running an airline. Even so, I think UAL has a few years of some pain ahead of it. It is a shame, 2 years ago United was on top and now they are sinking fast, mainly do to bad decisions on top. Greenwell needed to tackle these issues before they became problems, and relealized a merger with USAirways had no shoot ever passing, still can't believe he didn't see this, and actually negotiated with the pilots before the slow down took place. I still don't think he never realized how damaging that could have been, could have been avoided tooo. UAL never negotiated before then, plus announcing a huge merger in the middle of this, anyone could have seen massive labor troubles ahead.
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RE: EXCLUSIVE. "A United Divided, Cannot Fly"

Fri Jun 22, 2001 12:57 am

I am very sorry to see United, my former "hometown airline", in trouble. But they have certainly brought it on themselves. I don't know what I've done to deserve it, but each of the last 10 times I've flown UA it was hell, and always for a combination of reasons. It is really a shame, because the O'Hare terminal is one of the most beautiful thing s on earth, and the service was once so good. It seems the company was arrogant. I've interviewed for a few jobs in Chicago with them, and their treatment of applicants said it all - that air of "we don't care what you think. Everyone wants to work here. Take a number. You're not that great. We're too big. It doesn't matter." That's a lot to read in people's eyes!!!

The attitude at American in Dallas was so much different...
Posts: 5178
Joined: Wed Mar 01, 2000 11:10 am

AF 007

Fri Jun 22, 2001 2:22 am

American is a terrible company to work for. Ask my dad. Baaaaad treatment.

Well, I should qualify that statement. He worked for them in the early 1990s, and that was not a good time to work for any airline. He eventually left when they started layoffs by seniority number- his was too close for comfort.

But at that time, they treated their employees with incredulous disrespect. Didn't listen to one suggestion. They had the suggestion box concept going, and would award employees who had ideas that saved the airline money. They bought a new 757 with the money some employees had saved. Does that make sense? I didn't explain it well.

But anyhow, those here in Dallas at the res center were not listened to, treated terribly, given poor working conditions, and not allowed to do things like... use the restroom. IT was a really bad situation, and the pay was just awful.

But that was back then- who knows how it is now?

Back to the subject at hand, what do we think of United now?

Someone predicted a while back that we would consolidate this whole industry into Three airlines.

First, American. Don't forget they were in talks with Northwest at one point surroiunding this merger fury. And of course, everyone knew at one point that the AA/TWA deal was imminent.

Second, Delta. Or Continental. Either way, they would merge into... Deltanental. Or Celta. Like the Scottish, no? But they could absord a few other small ones.

Then United. They would take US.

But now, it looks like United may not be a major player in the industry in the next 20 years or so, in spite of what we thought just a year or a bit more ago...

Will they shrivel up and dissappear? It would not be the first time that the world's greatest airline blew away with the wind. Look how long it took Braniff. Four years from at or near top to nonexistent. Pan Am. TWA. Well, Trans World is an exception- they haven't existed for the last twenty years if you think about it. Eastern. All of these are big big big airlines that just dried up and dug their own graves.

Hmmm, point to ponder.

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RE: EXCLUSIVE. "A United Divided, Cannot Fly"

Fri Jun 22, 2001 2:57 am

Imkeww - just a word of caution that Holly doesn't always appreciate her copyrighted material (which she charges $9.95/month to access) to be posted all around. However, it is a good conversation starter.

UA's problems can be linked to one single factor, which is ALPA. Their actions last summer not only left UA stumbling to recover lost ground, but also wound up raising labor costs SIGNIFICANTLY. There has been an increase of over a BILLION dollars in labor costs since 1999, which amounts to about a 20% increase. If those costs were more reasonable, we might actually be seeing decent financial performace from UA this year.

Honestly, apart from that, Goodwin and his boys have done a great job with UA. If labor and fuel costs had grown proportionally with other costs, UA would have turned approximately $40 million in PROFIT in Q1 alone. Unfortunately, fuel skyrocketed at the same time that labor costs did and that send everything to hell in a handbasket.

A demoralized management team cannot function effectively, and that is a problem at United. They have seen so many setbacks recently, first with ALPA's summer from hell, then the UA-US deal fizzling out, the threat of AFA action, and finally AA-TW going through was a nail into their coffin. These guys don't believe in themselves anymore. They need to be replaced, starting with James Goodwin. Sorry Jimmy, but you can either go with some dignity, or you can be the next Frank Borman and cry at the press conference.
"The A340-300 may boast a long range, but the A340 is underpowered" -- Robert Milton, CEO - Air Canada

RE: EXCLUSIVE. "A United Divided, Cannot Fly"

Fri Jun 22, 2001 4:23 am

If labor and fuel costs had grown proportionally with other costs, UA would have turned approximately $40 million in PROFIT in Q1 alone.

Yes, and if "Pearl Harbor" had been well written and acted, it would have been a good movie. If Al Gore had won his home state, he would be in the White House today. If John had stayed single, the Beatles would not have broken up. If Bill Clinton had not had an affair with Monica Lewinsky, he would not have been impeached.

But all of these things did happen. The question, however, is why. DCA-ROC is right on point with the problems at United. UA sought to do an anti-competitive deal at the same time it was negotiating with its pilots. When trying to get DOJ approval, UA felt it inappropriate to have a strike. After all, why give the DOJ, not to mention Congress, a sneak preview of the hell that is the post-consolidation world. Rather, they caved to their pilots. On top of that, Goodwin acted quickly to hedge fuel as did other carriers at the outset of the price increases. Consequently, UA has been harder hit than its two main domestic rivals: WN (in California) and AA (everywhere else). The labor and fuel costs are therefore largely of UA's own creation.

Holly did not get into the real problem with UA's management team, but her analogy was right on. Half of the senior management (Goodwin included) was hired by the pilots while the other half belongs to outside directors. UA's management, it seems, is in the midst of a civil war. The situation with the bizjets, therefore, is just as Holly suggested: a married couple that has a kid as a distraction to their own disfunction. I am afraid everyone is correct, UA will not make a profit for some time to come. Too bad for shareholders and employees.

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