United Airlines has released its 2014 Quarter One investor guidance and the figures are ugly. United blames the weather, the late Easter holiday, and the reduction of its regional jet fleet, but the signs point to a more ominous reason—continued poor management of world’s largest airline.
My aim here is not to personally attack CEO Jeff Smisek or his team. Rather, it is to demonstrate that United’s continued excuses for its poor performance both outright and relation to the competition expose an endemic problem that gets to the heart of the management failure of the “new” United Airlines, now two years old.
United’s passenger revenue per available seat mile (“PRASM”) is down again: revenue that had been projected to be up 2% will instead fall between 0.5% and 2%. Here is United’s official spin:
Due to the severe weather, United’s combined January and February 2014 month-to-date regional completion factor is 87.1%, nearly 9 points lower than its mainline completion factor, an extraordinary low level. Due to the shorter stage length of regional flights, regional [PRASM] is typically almost twice as high as mainline domestic PRASM. Consequently, the reduction in regional flying has had a disproportionate effect on United’s consolidated PRASM. The weather-related cancellations to date have reduced first quarter 2014 consolidated PRASM by approximately 1.5 percentage points.
Additionally, March yields have weakened, in part due to a larger than expected shift in Easter and spring break demand from March to April.
Poor weather did hit United particularly bad. With perpetual storms affecting hubs in Chicago, Cleveland, Washington, and Newark, United has cancelled over 22,500 flights year-to-date, with 20,000 of those cancellations regional flights. Regional jets to smaller destinations tend to fetch a higher ticket price, thus it is not surprising that PRASM is down again. But that is not the whole story.
Delta Does Well
Delta cancelled 12,000 of its flights and faced horrible weather as well at its Atlanta and New York Kennedy hubs. But, Delta proudly reported a 4% year over year PRASM gain today and attributed a 0.5% increase to the weather…which is the industry trend.
Normally poor weather helps PRASM numbers because cancelled flights usually mean that other flights go out with higher loads. A simple way of looking at it is that money is saved by not operating flights if those passengers can be accommodated on other flights that the airline is already operating.
While United is forging ahead with $2BN in cuts, Delta’s revenue continues to grow as it adds services and amenities to its in-flight product.
United’s Deeper Problem
The problem for United is that the excuses are wearing thin: it continues to make excuses, time after time, quarter after quarter and things are just not getting better. Last month United revised earning estimates down using the same reasons—weather and a late spring—and now it is using the same excuse for the even worse numbers now emerging.
Let’s not forget United’s enviable position of power as world’s largest airline in late 2012/early 2013. United had the best route network, most fuel-efficient fleet, and the best hard product of any U.S. legacy (lie-flat seats on 100% of international longhaul flights). With service to six continents and a powerful presence in 49 U.S. states, no matter where you were going, chances are United could get you there. If not, one of its Star Alliance partners certainly could. Further, while Delta and American were operating many longhauls with dated angled lie-flat business class seats, United could boast horizontal lie-flats on all of its longhaul fleet.
Rather than capitalizing on that advantage and rapidly installing internet on its aircraft to match the competition (or high(er) speed internet to beat the competition), the leadership at United patted itself on the back and uncorked the champagne. Instead of using its brief opportunity in a leading position to further distance itself from the competition, it let the competition catch up.
Now Delta has caught up in terms of hard product and American is close behind. Delta and American have wi-fi throughout much of its fleet while United still lags far behind. Delta has positively enhanced its onboard service again and again over the last year (see e.g. complimentary meals on transcon flights in Economy Comfort, enhanced Sky Club amenities, free alcohol in economy class) and even won the prestigious 2014 Airline of the Year by Air Transport World magazine. Both American and Delta will soon have all lie-flat seats on its premium transcon routings between JFK and LAX/SFO, further snatching from United a competitive advantage that it has failed to capitalize on by offering such a mediocre soft product.
United still has the best route network, but Delta has a powerful one of its own and if the merged American expands its service and partnerships in Asia, United will lose one of its final strategic advantages. With disgruntled employees and labor disharmony, an archaic passenger service system, fuel on the rise, a regional jet pilot shortage, and a paradoxical goal of cutting its way to growth, 2014 is already shaping up to be a bad year from United, even if it ekes out a profit.
Thus, the problem is not just bad weather or Easter being in April instead of March, but a failure of vision and key strategic blunders that have now made United much less competitive relative to Delta and American.
The Solution: A Differentiated Vision of Loyalty
In a future post, I will lay out my case for United’s best hope of remaining profitable, and that is through a differentiation of loyalty. My plan will go far beyond just tinkering with United’s MileagePlus loyalty program, but appealing to a market segment that Delta has now forsaken but United can capture without sacrificing the integrity of its premium product.
Proving that bigger doesn’t mean better. The consolidation into 3 mega carriers is about short-term thinking. The traveling public will lose when it comes to service and price; witness the change to Delta’s mileage program, and that’s just the start. The 3 will have the attitude of you wanna fly, then shutup, and can be likened to bailed out Gov’t Motors. To paraphrase Henry Ford: You can have any seat, as long as it’s empty and at our price. 30 years down the skyway see if the ‘big 3’ are still around in their present form. Doubt it. Go Finnair!
I don’t think you can write off the weather as much as you do. UA’s major hubs (EWR, IAD, ORD and CLE — and this winter even IAH) have been more unduly hit by bad weather, while DL has only had to deal with major multiple groundings at JFK/LGA/BOS and just one occasion at ATL, its major hub. (It will be interesting to see where AA and US stacked up with the impact of bad weather.) Otherwise, your analysis is on base. UA has seemed to undermine its own advantages.
For example, its major advantage of an all-flat bed international fleet may actually turn out to be a liability. The ex-UA planes have what must be the worst premium seat in the air. It’s too cramped — 8 across on 777s and 744s — and aisle seats lack privacy with the front-/back-facing arrangement. Not to mention no functional storage space. I don’t even both to purchase and upgrade fare when flying those routes, and much prefer AA’s older almost flat seats (and its new 1-2-1 configuration and seat itself puts UA’s in the dust — clearly the new-UA realized the massive error of seat choice and put the ex-CO new C seat onto its refurb’d 757 PS service and all 787s). Economy on most of the 744 fleet is still an embarrassment with its lack of personal IFE. UA’s major advantage, at least for its elites, has been E+ but both DL and AA have adopted and one-upped UA on that seating. The $2 billion cut-back program only cheapens the product in economy further, as has the upping of STAR premium awards. UA has focused on its Global Service members (granted these are uber-high yielders) at the expense of its 1Ks, and thus faced an exodus of the latter to AA (who offers its ExecPlats a far superior list of benefits). [Curious Steve, but under “the government”, GM has gone through a major overhaul, lost its culture of arrogance and emerged back into its former #1 position, while paying back most of Washington’s investment.]
Well, Matthew that sums up my feelings quite well. its getting harder and harder to not jump ship. This article taught me things about Delta I didn’t know which may make it a viable option for me – I’m also considering VX.
The merger was probably the best opportunity for success in US Aviation history, yet it was completely squandered and competing legacies have benefitted greatly from it.
I’m still noticing a huge discrepancy in longhaul BusinessFirst. I took a NRT-SEA flight on a 3 class 777 and we were served our meal on a tray with everything but the hot part already on it – they just wheeled the catering cart down the aisle (just like in economy) and dumped the trays on our tables. Sundaes were served the same way similar to the old ps C. On the 3 cabin aircraft they rushed the meal as fast as possible and they all literally disappeared until the (pitiful) second “meal”. I was not addressed by name even once.
Shortly after I took a STR-EWR flight on a 2 class 757 and no trays were used, no catering carts were bought in the aisle, the quality of the catering was higher, and everything was brought in courses. Soft product was better too – my drink never got empty and at least one FA remained visibly available the whole flight. I was addressed by name at least twice. The 3-cabin flight was longer than the 2-cabin flight, and competing carriers on TPAC are arguably tougher competition than on TATL.
Fares are through the roof! I paid $857 for a low-fare bucket economy ticket from LAS-ORD – it was the cheapest I could find. How could they possibly not be making more profit with these ridiculous fares? And i’m tired of them saying “airfare is so cheap and the price hasn’t gone up in decades.” The price HAS gone up! They now force everyone through hubs, load factors are so high there is no room to deal with IRROPS, we get charged separate fees for everything now, service is worse, we have less space and comfort (remember when regular Y on some UA 727s was 37″ pitch?) So if you factor in all the other “costs” that now accompany the fare that used to not exist and the cuts in product and loyalty programs, air travel is WAY more expensive than it used to be!
Wow. I must be a little more angry about all this than I realized…
Two comments: UA seems also to be taking a meat-axe to its route network. Dropping NRT-BKK will eventually come to be recognized as a mistake. That traffic won’t shift to NH, it will go elsewhere and hurt all the USA-NRT flights. Dropping SEA-ANC at the start of the summer tourist season? How does that make sense? And SEA can operationally support ANC service (e.g. 737 pilots and FA base.) It feels like Smisek is measured on margin and he’s lopping off lowest margin routes without considering the network effects, nor considering the long-term potential and investment in the routes.
Second comment: almost everything UA has done since the merger has been about cost. Cut cut. Cheaper coffee. Cheaper res system. No pillows. Cheaper food in the premium cabins. Cheaper liquor in the Clubs. Don’t you think that’s going to show up in lower revenue eventually. Customers notice all the cuts.