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
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
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
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.
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?
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.
* * *