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.


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

  1. Neil S. says:

    I’m no financial expert, but it’s a bit confusing.

    Delta still has plenty of gas guzzlers – MD80/88/90, 717, 757 – and it just made over $1B in profit last quarter. I know it’s not apples to apples, but doesn’t that fuel savings goal seem a bit, what’s the word, impossible in the next year?

    • Dr. Jordan says:

      Well, Delta’s approach is multifaceted. The -90s and 717s that they are acquiring have lower acquisition costs and this is their plan to help remove the 50 seaters. They have an order for 739s and 321s that will replace the 757s ultimately.
      Also as a caveat – the 717 and MD90 aren’t exactly gas guzzlers. The DC9s will be out of the fleet by January.

      • Art H. says:

        Those 717’s will be great addition to the DL fleet and will hasten the withdrawl of those CRJ faster. Its funny how the circle of life in the airline biz works with DL leasing DC9-30’s to the predecessor of FL, ValuJet in the early 90’s when the started and now FL thru WN is leasing the 717’s to DL.

    • CF says:

      Neil S – Yeah, I think the idea is that this is how United is going to improve its results. Using less gas, well, that helps. Could they be more creative and buy less expensive airplanes? The Continental team has never liked that option (well, not in the last 20 years). But this is still supposed to show improvement over what we see today.

  2. Shane says:

    For Ancillary Revenue, I think it will depend on how creative they are. If increasing revenue means following the ULCC model for “added value” to pay for any seat assignments, printing boarding passes, etc or by simply raising already established feed (maybe $50 per checked bag or $500 change fee), then United will surely fall behind. With 2 strong competitors after the AA merger closes, creating a complex a-la-carte menu of fees and devalued “value” items will only push consumers to the other airlines (at least until they follow suite).

  3. CS says:

    I like what they are doing with their mobile apps. Being able to quickly see how much a day pass to a club or the cost to upgrade a seat makes me more likely to spend more.
    Additionally the apps have a very clean look, it will be nice to see that transferred to the website.

    • Jorg says:

      You know, started thinking about your comment. I have apps of several (European) airlines on my cell phone, but never have I gotten a message saying ‘welcome to Frankfurt. Did you know you can access the lounge for only Eur 25?’ or something similar. They know me, they know where I should be, etc. Or even better: ‘upgrade now to Business class for only 150 euros’ would really make me doubt about actually doing it. I know this price would never happen, unfortunately, but it would make them more money than upgrading frequent flyers for free…

      Or some pro-active message of where to go to for my next flight would make me open the apps more often.

  4. Chicago Chris says:

    It’s also worth noting United’s seat upgrades. Skywest started installing the new seats on its CRJ-700s and I’ve also seen them on mainline A320s. It’s similar to Southwest’s design and allows them to fit (squeeze) an extra row of seats.

    On the 700s it increases capacity to 70 (6 First and 64 Economy), equal to the E170s Shuttle America flies. On the A320s it goes from 144 to 150 (12 First and 138 Economy).

    They’re actually pretty comfortable compared to this weekend’s flight in the last row of an older A320.

    Given the revenue management issues, I’m interested to see if they can handle all the variations in seating to ensure the planes are properly booked.

  5. jonathan reed says:

    Economy passengers come in two varieties. One variety will simply book on the basis of price and schedule. The other, of which I am one, will try to book on comfort and schedule.

    My impression is that a non-elite or (even possibly the lowest level elite) flying economy on United is better off taking some of the competitors such as Blue Jet or Virgin American or Hawaiian in terms of the flight experience. However, even though I fly economy I gladly pay extra for extra space and to avoid the discount airlines which have the least space per seat. United’s economy plus solves the seat pitch problem but not the seat width problem, especially with 3+3 seating. I know United is constantly fine-tuning what sort of minor upgrades economy passengers can pay for such as earlier boarding, economy plus, faster security lines, etc. However, I wonder to what extent non-elites (or even lowest level elites) still feel that Hawaiian, Blue Jet, Virgin, and WestJet offer a better experience.

    I recall one experience in United economy years ago when a FA announced on the PA that they were there for safety not the passengers’ convenience. It left me with the impression that if you are not an elite on United, and you are in the back of the plane, you are, in the eyes of the FAs the great unwashed hordes to be tolerated.

    • Courtney says:

      I’m a United 1K and I’d argue that JetBlue, Hawaiian, and Virgin America all offer a better economy inflight experience than United (and are sometimes – on some routes, frequently – more expensive than United). I’d fly them all more often if I wasn’t “married” to United by nature of my location (SFO) and my most frequent destination (Asia).

      JetBlue has free snacks, inflight entertainment and generally helpful crews in my experience. It’s been a while since I’ve flown them but I’ve felt their economy product to be better than United’s.

      Hawaiian’s customer service is generally very good, they still give free food on a lot of their flights, and you definitely feel the “aloha” unlike United’s Hawaii flights which now are pretty boring minus “halfway to hawaii.”

      Virgin has one of the best in flight experiences in economy – sure, the crews can occasionally feature some arrogant pricks, but wifi, power outlets, comfortable leather seats, and TV/in flight entertainment are four features that I rarely see on United domestically these days.

      I’m assuming that FA made that comment to make a point, not as an excuse to blow off the passengers (though we all know they do that too) – I’ve heard them say that when potential safety concerns come up such as stopping drink service due to turbulence and checking passengers’ seatbelts, preparing the cabin for landing, etc etc – sure, they can be rude for no reason, but some passengers are very entitled and treat the FA’s like servicepeople who should be at their beck and call and that’s just not the case.

      • Jonathan says:

        I totally agree with the “married to United” comment. If only… and I’m at one of the other super fortress hubs… IAH/EWR.

  6. Glen Lewis says:

    I have flown over 75 times this year, and when the conversation comes up almost everyone I talk to that fly a lot says United is the worst airline they “have” to fly. Most of the conversations center around the flight attendants and their attitudes. The rest is their frequent delays. United, take some of the “shareholder money” and give it back to the employees. This is attendants and bag handlers and gate agents. NO ONE ever has invested in airline stock thinking they were going to make money. It is a hum-drum long term investment like railroads, etc. So, United, get real, put some money back in to your customer service. Your “merged” partner Continental used to be famous for customer service!

    • Ake says:

      “NO ONE ever has invested in airline stock thinking they were going to make money.”

      So if they don’t invest to make money, then what?
      For charity?

      A long-term investment is still an investment you expect to make money…

      Though I know a fair amount of countries that invest in their national airlines to keep them afloat… but no private investor would do that.

  7. There is no doubt in my mind that UNITED will continue leading the domestic market in cutting customer comfort in flying, slicing customer service standards, aggressively continue to be the first to test raising fares, and lets not forget inventing new fees such as selling tokens to use the restrooms. They will squeeze every cent of profit from consumers that they can, in my opinion.

    I am just waiting to see how much more the public will absorb before there is a backlash on these policies of torture not seen since the Requisition!

    • Joe L says:

      The Requisition? Was the some plague of purchase request forms?

      The word you are looking for is Inquisition, as in Spanish Inquisition.

      -This- consumer would prefer to be represented by someone with a greater command of the language.

  8. Brett – Did UA specify how much they’ll spend to market united.com in order to shift bookings there? For instance, when last I checked (which is to say, not just before posting this) advertising made up a larger share of WN’s CASM than other airlines’, because without OTAs to push demand to them, WN has to pull demand to Southwest.com. If UA wants to pull more demand to its website, it will have to spend some of its third-party distribution savings, initially at least, to change target customer behavior. It won’t likely happen by itself.

  9. A says:

    I desipise the “lets cut our way to profitiability” nonsense. It simply does not work. Increasing productivity sounds great but most companies are already pretty lean these days. It’s not like the 1980’s where there is a lot of fat that’s easy to painlessly cut.

    The one thing not mentioned because it’s the poision pill, but IMO needs to get discussed, is raising fares. A lot of flying is still very cheap and raising fares on at least select routes should be considered. I work in a field that keeps getting squeezed and know all too well there comes a time when you just have to raise your fee or get out of the business.

    • Andotally what I’ve seen is UA has been a low price leader. I flew them out to Ohio specifically because they were the cheapest. (I also held my nose a bit when buying the ticket.) I’m sure if UA could get away with charging more they would..

      • Kevin says:

        I would argue this is market by market. I live in NJ and fly out of EWR. By no means is UA the cheapest. Yet a ton of people from NJ still fly them.

      • Dr. Jordan says:

        They sure are the MOST expensive option out of Houston…we are held hostage…I can’t wait until the FIS at HOU is completed.

        • John says:

          Agreed. I have a potential last minute trip to to New York tomorrow. UA has IAH – EWR for $2300. WN will do it on a nonstop for $1100 plus they won’t charge me for a seat assignment or a checked bag. United has better flight times, but I can stay overnight and fly home the next day on WN for less than the fare difference.

          It is rare that I can find a good reason to fly United anymore other than to Asia and I used to be OnePass Elite.

      • CF says:

        Nick – Actually, they should be charging more and they’ve admitted as much. They’ve been blaming their revenue management forecasts for selling too many of the cheap seats and then not having enough available for the last minute high dollar traveler. So prices should go up as soon as they get their act together. (This should have happened long ago.)

    • David M says:

      You can’t cut your way to profitability was a major point of Gordon Bethune’s book. Ironic, then, that is the mostly-ex-Continental management team that’s leading United these days.

  10. Steve Kalman says:

    Loyalty comes in two flavors, love and barrier.

    The former is the kind of loyalty that gets people to stand in line overnight to be the first to buy a new product (Apple has lots of this).

    The other is loyalty based on the hurdles that discourage switching (think of the hassle of changing your checking account bank — direct deposit, automatic payments, paying for new printed checks, etc.)

    That’s the kind of loyalty UA has for me. I have tens of thousands of miles earned without leaving home (via credit card bonus and spend). I have annual-payment E+ (one fee for all the E+ I want), free club via Turkish Star-gold and most of all, they hub at EWR which is my home airport. By the way, I fly about 35K per year; not enough for UA-gold but enough to keep TK-gold and worth the E+ buy.

    Changing to AA or DL would be a hurdle that those airlines would probably not find worth the enticements and UA knows it.

    • My dear Steve, You must have read that UNITED just DEVALUED your miles. People who simply sit on miles are asking to lose them to profit preditors (like UNITED). However, if you don’t mind having dwindeling assets with a company like that – GO FOR IT!

      • David M says:

        Actually, since he says he has Star Gold via Turkish, he actually has miles in TK’s program, not UA’s. So he’s not affected by UA devaluing miles, since he’s spending miles via TK’s program, rather than UA Mileage Plus.

  11. Troy says:

    Ancillary revenue…snore! In my view, ancillary revenue is not at any airline’s core. This is a tired concept. Actually, the plan overall sounds rather tiresome, to be honest. How about something exciting?
    In Sydney, the big joke is the UA big screens over the Pacific. Other airlines have had personal IFE for a decade or more, while UA is still stuck in the 80s.

  12. RAW says:

    After disappointing investors, this latest is just another attempt at spin from a flailing management team. The merger integration has not gone well. They STILL don’t have it under control (customer reviews on Skytrax are telling; United has the lousiest evaluations, and most of it because of continuing operational failings). After trying to ‘change the tune’ on the consumer front (with their most recent, throwback ad campaign (“Fly the friendly skies”), this press release is aimed at investor relations (and, opinion leaders like Cranky). Problem is, if you can’t back up your marketing, you’ll end up with cynical recipients of your whitewashed messages. Smisek’s team appears in over its head: overpromised, under delivered. This may buy them another year by muddling the issue. But is all this marketing money well spent? These efforts seem to provide long term value only for one set of stakeholders: current management.

  13. John G says:

    My take is that they have done a rather poor job of marrying the United and Continental cultures. The CO culture was very superior, in terms of service, attitude, and outlook amongst the employees. United? Not so much.

    I try hard to avoid flying through former United areas, but I don’t mind flying though the CO hubs. The old UA people simply don’t care. That comes through loud and clear.

    You read this, and the biggest think they are looking at is ancillary revenue. Great! We are going to take an airline that already annoys a lot of its customers, and start nickel and diming those customers ever more to squeeze more money out of them.

    I think eventually, in the very long term, the legacies are going to have to differentiate their product from the ULCCs. If the passenger experience is similarly poor on UA and Spirit or G4, but the cost on UA is $200 more, as the ULCC capacity grows, the traffic on UA drops.

    They need to improve the customer experience, and it starts with the attitude of the employees.

    • Carl says:

      “My take is that they have done a rather poor job of marrying the United and Continental cultures.”

      I’ll agree with this.

      “The CO culture was very superior, in terms of service, attitude, and outlook amongst the employees.I try hard to avoid flying through former United areas, but I don’t mind flying though the CO hubs.”

      But you lost me there. You find the service and attitudes of CO employees at EWR to be superior? And the CO FAs who rush through their service so they can disappear in their galleys? The grass isn’t any greener on either side.

      Frankly I wonder how much the myth of CO superiority and the arrogance that CO brought to the merger is the cause of the merged airline’s problems. Certainly the vast majority of the executive suite of the airline as well as most of the station managers are all CO employees. To the extent they did a terrible job of merging the cultures maybe it’s because CO came in, told everyone how much better they are, and told everyone it had to be the CO way. Whether it’s the Freshpoo coffee they shoved down our throats with lies about how much better it tasted or the fiasco of the computer system they imposed – and they are still blaming the systems for revenue problems. Or how about on international flights putting linens on the passenger tray tables before the seat belt light is turned off, and then disappearing for 30 minutes for the first drink service. That’s the CO way, and we have to do it that way the FA’s tell me.

      Plenty of problems, but it is the allegedly-superior CO people who have been driving this bus, from Smisek on down.

      • MeanMeosh says:

        To me it seems to be much more of an “us vs. them” on both sides problem, as opposed to either CO or UA trying to shove the others’ systems down the others’ throats. Ask many pmUA flyers, and they’ll tell you how great UA was and that CO ruined it (for a good example of this, read Matt Klint’s blog at upgrd.com). Ask many pmCO flyers, and they’ll tell you how great CO was and that UA ruined it. It sure seems like Smisek hit a rather crappy daily double, as the worst parts of UA and CO survived the merger, leaving us with a decidedly poor airline.

        FWIW, I liked CO better than UA, though how much you enjoyed CO really depended on which base you flew from. The IAH crew was always pretty good. EWR crews, not so much.

        • Carl says:

          I agree that the IAH hub as well as the IAH crew were far and away the best in the system and may still be. Pleasant and friendly. EWR was a huge contrast, whether flying EWR-Florida or especially the international flights staffed with EWR crews.

        • John says:

          That’s been my view as well. It’s like they took the worst aspects of both airlines and kept them. The only thing they’ve done right is create a good mobile app. I hate being nickeled and dimed to death between bag fees and Economy Plus, and I hate how the extra fees get billed out because it doesn’t fit our expense form. I just want to check my tools (because I can’t carry them on anymore), board my flight, do my job, and get home. It’s easier to do this for less money on WN and B6 out of HOU than UA out of IAH. Bonus: I don’t have to drive to Humble from Sugar Land.

  14. Carl says:

    Shifting the aircraft to more profitable flying from the Asia reductions is kind of bullshit. SEA-NRT is operated by sUA 772. NRT-BKK is operated by sUA 744. NRT-ICN is also sUA. The two new flights announces are both operated by sCO aircraft, 764 on IAH-MUC, and sCO 772 on IAH-NRT. SFO-TPE is not new and it is has been announced multiple times. It’s a historical route. I think UA is planning to park some 744’s, so it’s not about shifting, it’s mainly about shrinking. And with the exception of SFO-CTU (which they’ve announced about 6 times now), the rest of the 788 flying has replaced existing 763 or 772 flying, so it’s just downguaging, and not expansion. The 788 should have save SEA-NRT.

    The other point – UA has been cutting costs continuously since this merger. Whether it’s removing pillows and blankets or using the crappiest cheapest coffee then one penny can buy. I don’t think UA has a cost problem – I think UA has a revenue problem. They are reducing the product’s attractiveness for customers who will pay a premium. They need to work more to attract high revenue customers.

  15. jonathan reed says:

    “Barrier loyalty” is tricky with Mileage Plus miles being awarded, perhaps, more with credit cards than butt in seat miles. All of my personal and business spending, whenever possible, is on either United branded credit cards, or credit cards that can convert to United Miles which I use for trans ocean premium seats and I have the ability to be flexible in picking travel times. I no longer fly enough to have elite status. If United makes my miles too hard to redeem, I’ll dump the credit cards. But if I am racking up the miles on the business and personal credit cards, do I care if I miss out on a few hundred or thousand miles because I think another airline has a better economy product.

    United has some strengths. I think they are less likely to leave you stranded overnight at an airport if one of their planes has a big mechanical issue. For all the bitching on flyertalk.com about the outsourced customer phone service to India, they do actually answer their phone with less wait than some airlines such as Virgin America. I would love to see them offer a better economy product and there are at least some of us who do seek out the better airlines for our travel even if they cost more.

    Finally, sophisticated travelers know that it is usually better to book directly with the company offering the service (unless the company is so bad that you want the protection of a booking agency). I would love to see United do an ad campaign along the lines of, “We offer a better product, yeah we charge more than some, but we are better, and you can only book directly with us so that all of your ticket price can go towards giving you a better product.”

  16. Bill says:

    Cranky I know I’m a little late to this party but I thought you and your readers might find thi particular article interesting. It is a scathing and spot on critique of $mi$ek’s Investor Day comments.
    http://upgrd.com/aerospace/jeff-smisek-needs-to-step-down-as-united-chairman-and-ceo.html

  17. Pingback: [BLOCKED BY STBV] A Day with United Management: The New Website, Flying the Friendly Skies, and the Product Promise | The Cranky Flier

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