What Exactly Does United Mean When It Says It’s Going to Increase Long-Term Shareholder Value?

You may have noticed the release last week entitled “United Airlines Outlines Path for Increasing Long-term Shareholder Value.” If you saw it, you probably ignored it because it sounds like a Tilton-esque dose of corporate speak. And indeed it is, but keep in mind that this was for investor day, so it’s aimed at the financial types and not your regular traveler. Still, there was some interesting info in there, so I thought I’d act as an interpreter.

In general, United has been considered the financial laggard. Revenues have underperformed while costs have grown too quickly. So, this plan is, in theory, meant to fix it. How will it work? Like this:

United's Plan to Increase Profit

Quite the complex plan, eh? First, reduce costs. Second, increase revenue. Third… profit! Yes, they can do math at United. And of course, this will all be done “while delivering competitive reliability and excellent customer service.”

Sounds great to me. Every underperforming business would like to use this exact same plan, but the devil is in the details. So, what exactly are those details?

Costs Going Down
This plan is expected to reduce costs by $2 billion annually with 75 percent of that coming from two areas.

  • Reduce fuel consumption – Half of the annual $2 billion savings will come from just using less fuel. That’s going to come from two places. First, there are new airplanes coming into the fleet replacing more of the older, gas-guzzlers. (Example: replacing the domestic 757s with 737-900ERs.) And second, the addition of more winglets will help reduce fuel burn. None of this sounds like news to me. They’ve known these airplanes were coming for a long time. But it is the biggest part of the plan.
  • Increase productivity – Another quarter of the savings will come from increasing productivity. That means both “improving efficiency,” which I take to mean have people work harder, and through the greater use of self-service tech like self-bag tagging so that there’s a need for less labor time.
  • Reduce sourcing costs – The airline will save $150 million a year this way. Don’t ask me the details, because it’s pretty boring stuff.
  • Improve maintenance processes and inventory procedures – Ready for this? United will save $100m as it works to “realign work with core competencies and implement lean practices.” Basically, it means, they’re going to make maintenance more efficient in several different ways.
  • Optimize distribution methods – The final $100 million will be saved by shifting more bookings to go direct on United. The website costs United half as much as taking a third party booking.

That’s the cost plan in a nutshell. A lot of it isn’t new, but at least it’s pretty clearly broken out. I can’t quite say the same for the revenue plan.

Revenues Going Up
On the revenue side, the plan is somewhat more fragmented. I’ll try to boil it down the best I can, but I’ll have a lot more clarity on this in a couple weeks. United has invited me out to Chicago to visit with some of the folks at headquarters to tell me more about this.

  • Increase ancillary revenue – This one actually does have a hard number attached to it. Ancillary revenues should increase by $700 million a year. How so? Well, they’re going to “optimize” existing ancillary products like Farelock or paying for upgrades. (They’re hoping to be able to revenue manage all these things.) They’ll also add new services like wifi, streaming video, etc. The new website, coming soon, will help to sell more stuff. Oh, and expect more efforts to make money from miles by creating more opportunities to earn and burn them. (The more useful they are, the more people will buy-in.)
  • Fix revenue management – United heaped a lot of blame on its revenue problems last quarter on revenue management issues. Most of the excuses sounded pretty thin to me. Basically, United sold too many cheap seats, didn’t overbook properly, and just basically left a lot of money on the table. The fix should have happened quickly once they discovered the issue, but it is still in progress at this point.
  • Stop flying unprofitable routes and put the airplanes elsewhere – This is always an ongoing process, but in this announcement, there was a concrete example of what United is looking at. The airline is continuing to shrink the Tokyo hub. It will stop flying from Tokyo to Bangkok (that closes Bangkok entirely for the airline). It’s also downgauging the Tokyo-Seoul flight from an international widebody to a 737. And the Tokyo-Seattle flight is finally going away. This seemed like an obvious move once joint venture-partner ANA started flying it. That frees up enough aircraft time to start a second Houston to Tokyo flight and a first Houston to Munich flight. That’s a better way to use an airplane.
  • Start flexing the 787’s muscles – So far, we’ve seen United put 787s on underperforming routes like LA to Shanghai – routes that needed smaller airplanes to match demand. But next year we’ll see a glimpse of where the 787s can start going when United launches the San Francisco to Chengdu (China) route. That’s a great example of a route that only the 787 could open up. We should see more of that as more airplanes come on the property.
  • Shrink the 50 seat regional jet fleetWe knew this was coming, but it hasn’t come that quickly. We’re now going to start seeing the plan really go into place over the next couple years. This year, 50-seaters made up 66 percent of the regional jet fleet. By 2015, that will drop to 53 percent. The balance will be filled by 70/76 seat regional jets which have First Class and Economy Plus, and offer an experience much more similar to mainline. In that sense, it should help with both costs and revenues.

As mentioned, this plan was somewhat more fragmented. I left out a few things, like an effort to improve corporate deals, but you get the idea. There are a lot of things going on right now to fix the problem. Whether it works or not, well, I guess we’ll find out over the next few quarters. But while the cost cuts seem fairly concrete, the revenue increases feel a lot mushier. I’m looking forward to learning more when I visit headquarters in December.

You can read the whole investor day presentation here.

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