As I said in a different post in a more direct and less polite manner,
There is not one chance of UAL meeting the target that Tilton has set. ZERO.
They will not exit bankruptcy in the fall, because in order to do so, they will have to submit a reorganization plan that the creditors will believe is credible. In order to achieve the reorganization plan, UAL is going to have to put together a business plan which is based in some kind of reality. So far, they were not even close on the last attempts with the ATSB, and unless something has radically changed at UAL headquarters, I have no confidence in UAL management to come through on this attempt either.
Here is my rationale:
Basically, in a nutshell, UA
management does not have a clear understanding of their customers. Absent a clear understanding of their customers, it is impossible for them to create a portfolio of products that the customer wants. United has operated under the premise that they will create the product and the customer will come to buy it because they are United. They are the leaders in the airline industry, therefore the business travelers will naturally fly UA
. This was the thinking in the 1960s.
When I was in sales in the 1990s, the principal theme was focusing on the corporate business customer (the corporation, not the flyer) at all costs. We were to do business with the corporate travel manager, do our negotiations with them and put 80% of our efforts, split between maintaining existing relationships and developing new relationships that would solidify United's dominant position in the Bay Area. Our tools were the Mileage Plus free membership upgrade all the way to corporate agreements that topped out at or near 25-30% discount, plus upgrades and other perks galore. The leisure traveler, we were told not to deal with them...they were left to the reservations staff and the travel agents were to deal with an inside sales force that was made up of principally reservations staff with greater authority.
In reviewing the 2002 reorganization plan in the creation of the one I am writing now, the research I have done has revealed some very interesting conclusions about the current managements' ability to get the current job done. Here is the result of the research I have done and you can decide for yourselves where you can stand on this issue of success or failure:
In UAs reorganization plan they have a chart on page 27, in which they state the six distinct market segments that they serve:
Segment Name % of industry customers
1. Road Warriors 11
2. Pragmatic Business Travelers 9 Business Driven
3. Reluctant Business Travelers 14 34%
4. DIY Leisure Opportunists (VFR) 19
5. Just for fun Leisure Travelers 20 Leisure Driven
6. Price-driven Occasionalists 27 66%
When looking at this model, it is easy to ask the question, why does United target the Road Warrior the most, then the Pragmatic and Reluctant Business Traveler, rather than the other 66% of the traveling public, who are out there and who would fly United if offered the right price?
There are even more in depth questions that need to be answered:
1. How do we know the travel patterns of each group, e.g. how many trips do they take per month?
2. If you look at the 66% of the Leisure Driven group, what would be the #1 driver to their buying decision – from this chart, it would seem the answer is price. They base their decision purely on price. This is because there is no value to airline travel anymore. The airline industry has taken the pleasure out of traveling by air. It is an experience that is now worse than traveling by bus.
Let’s take a look at United’s research on the subject (from page 28):
Here are some points to take away:
-Road Warriors travel the most, Price Driven Ocassionalist travel the least.
-Road Warriors are the least price sensivite, the Price Driven Occasionalist is the most price sensitive.
-Road Warriors are most impacted by Frequent Flyer Programs, primarily for status, the Price Driven Occasionalists aren’t even aware of Frequent Flyer programs.
-Road Warriors expect the best service, the Price Driven Occasionalist, do not care about service.
We can therefore conclude that the Road Warriors and the Price Driven Occasionalists are polar opposites. However, look at the similarities of the other groups:
-Pragmatic Business Traveler and Just for fun Leisure Traveler both travel frequently
-Pragmatic Business Traveler and Just for fun Leisure Traveler both are driven by their need to travel more so than price.
-Pragmatic Business Travel and Just for fun Leisure Travel are slightly different when it comes to service…the business traveler is not demanding while service is important to the leisure traveler. I would surmise that if good service were presented to the business traveler that over time, the business traveler would become accustomed to that and would miss it were it not present.
There are a lot of similarities between the Pragmatic Business Traveler and the Just for fun Leisure Traveler. They are both fairly price sensitive, yet are more travel driven and therefore would be willing to spend up if a superior product offering, e.g. nonstop service and or a more pleasing travel experience or both were presented to them:
-Reluctant Business Traveler and DIY Leisure Opportunist both travel fairly frequently for either business or pleasure, but not as much as the pragmatic business or JFF Leisure traveler.
-Reluctant Business Traveler and DIY Leisure Opportunist are very different in that the RBT does not care about miles and the Leisure opportunist is VERY interested in Frequent Flyer miles. They are very important to this leisure traveler.
-Reluctant Business Traveler and the DIY Leisure traveler both are price driven, the DIY Leisure traveler is always looking for the “best deal” and will spend time looking for it.
-Reluctant Business Traveler and the DIY Leisure Traveler are very different in that the RBT does not expect service (he has come to expect none), and the DIY Leisure traveler is interested in service, but the “deal” is the most important component. This person could be swayed to pay slightly more if they perceive they are really getting something for their dollar – value. This is a very intelligent traveler – very unlike the price driven traveler. Price is not the be all and end all. VALUE is the key with the DIY traveler.
The Road Warrior Misconception
In United’s reorganization plan on page 30, they have a slide which states the following:
-Road Warriors represent 11% of the population and 48% of airline revenue
-Pragmatic Business Travelers represent 9% of the population and 14% of airline revenue
-Reluctant Business Travelers represent 14% of the population and 16% of airline revenue
-Business total 68%
-DIY Leisure Opportunists represent 19% of the traffic and 10% of the revenue
-Just for fun Leisure represents 20% of the traffic and 9% of the revenue
-Price driven Occasionalists 27% of the traffic and 3% of the revenue.
-Leisure Total 22%
In their next slide on page 31, they have a slide in which they state what the relative factors are for Road Warriors in selecting a flight (2002):
-Frequent Flyer Program: 23%
-Service Quality: 11%
-Company Policy 7%
I find these statistics interesting, given the fact that their slide on page 28 indicated that they were least price sensitive of all the passenger groups and that they expect better service due to higher status. Given this slide that rates price higher than service, I am somewhat puzzled to know which statistic to believe.
I am inclined to believe the first slide on page 28 more than this information on page 30. It is more consistent with what is generally known of Road Warriors: a) Schedule rules then b) service, since they often need to rest and be ready to be at a meeting when the arrive after a long haul flight. c) Frequent flyer miles are important, since they often get them perks when they cannot get them from their company, e.g. free upgrades, recognition, special service, etc. Road warriors that have a personal relationship with the management of a major airline will live with that airline forever.
Leisure Traveler Misconceptions
Just as United has missed the mark with the business traveler, so too has it missed the mark with the leisure traveler. In its micro study of the purchasing drivers of the leisure traveler, it puts price as number 1 by far above all the other purchase drivers of all the leisure travel groups. In reviewing the original travel segments characteristics, we determined that 40% of the leisure travelers were price driven, however, when you combine the other drivers, we find that 60% of the leisure groups based their decisions on drivers other than price. Therefore, to base a decision wholly on the fact that the leisure group makes buying decisions purely on price perpetuates the concept of pricing as the driver for airline travel. This will keep airline pricing in the realm of the commodity. In order for United to survive, it must undertake a paradigm shift in its pricing orientation, away from commodity pricing. Only by improving the service product for the leisure traveler can United build value in its product for the leisure traveler. In addition, by selling that product at a price slightly about the competition can United build value in that product. The concept of selling up is not new; however there has to be a product to be able to support it.
United’s current management plan is flawed in many ways. Here are the principal drivers to failure:
United's conclusion regarding product positioning is that they have a network strategy based on a hub and spoke system, with a multiple airline product portfolio: 1) United - high quality, high fare for the business traveler 2) TED - low fare, no frills for the leisure traveler 3) United Express for the smaller city markets. This multi airline product positioning will fail for the following reasons:
a). They assume that the leisure traveler will focus purely on price. They have not considered the notion that the leisure traveler, if presented with a quality product may be willing to pay a little more for that product if it were marketed correctly, and the product offered gave true value for the money.
b) They also assume that commodity pricing is still a viable pricing model for the airline industry. I believe both Southwest and JetBlue (especially) has established that commodity based pricing system is no longer necessary if people want your product.
c) They also assume that the business traveler will continue to pay the high fares that will be associated with this high quality airline that will most likely have the high costs associated with it. Since United has not been able to control its costs, it is likely that they will depend on this airline to be the “cash cow”, bringing in the major profits for the company.
d) They also believe that they can create an airline in TED that will have the cost structure of the LCC like Southwest and JetBlue. This is not achieveable. In order to create TED, United will have to incur costs to start the operation in different cities, fund its operating costs, marketing, staffing, etc. This will be a hugh liability for United until TED can carry its own cashflow for it to stand on its own two feet. Even then, a good portion of the costs of operating that airline will still be borne by United, since they willl have to share facilities, reservation systems, airport costs, and most of all, accounting and revenue allocation costs. With all this said at the cost level United incurs for these costs, there is no possible way that TED can stand on its own and be able to have fares low enough to stand against Southwest and JetBlue and be competitive and generate profit. United Express stands alone in its own market niche, but its product is far inferior to the other products and therefore is inconsistent with the other products in the group.
e) Lastly, in today's current competitive environment, in which capacity far outweighs demand, even United has had to drop pricing to rock bottom dollar even on its most high yield routes. The current fare for travel tomorrow from SFO
is $309.00 one way, which is far below break even for the PS
service offered in Economy on that flight. It begs the question how much real revenue is being generated in F and C on that flight. It either is so high that they can afford to give it away in Economy or they are so desperate for revenue that they are giving it away in Economy to mitigate the loss. This one is difficult to answer. In any case, there is no possible way to make money when your most profitable route has walk up fares with unit revenues of 7 cents per mile and unit costs above 10 cents per mile.
While I recognize that this has been an exceptionally long post, this is only the tip of the iceberg in terms of the depth of the research I have done into the realities of the business mentality of UA
management, as well as their overall business planning skills. It is my conclusion that, as the ATSB has concluded, their short term conclusions regarding revenue rebound are over stated to a degree that begins to stretch credibility.
Given the low fares in the high yield markets in Economy, I cannot see United achieving the high yields it has to achieve under its current organization and product portfolio to achieve the results it believes it can achieve. Furthermore, I believe it is fundamentally flawed in its understanding of the customer and the dymanics of the needs of the various customer segments. It has reached conclusions that it wants to hear instead of reaching conclusions that it needs to hear, so that it can make the necesssary adjustments to its revenue base to weather the ups and downs of the various economic cycles that plague the airline industry. As a result, I cannot believe that the statements of Glen Tilton regarding the exit of United from Ch 11 in the Fall of 2005 nor profitability in 2006 have any foundation in fact, they are merely statements meant to puff up the industry to believe that United's situation is far better than they would like us to believe. The problem is, the situation is far worse then they believe that it is.
many thanks for reading
note: source document: "Plan for Transformation (Presentation)-Creditors Committee Meeting, January 31, 2003" available from the US Bankruptcy Court of Northern Illinois. see http://pacer.psr.uscourts.gov
for more details.
source document: "A Vision for the Future-United Airlines Reorganization 2005" - David L. Lamb, ITC,
David L. Lamb, fmr Area Mgr Alitalia SFO 1998-2002, fmr Regional Analyst SFO-UAL 1992-1998