“So we have to go down, find the express elevator, and then go back up?” I was having a hard time wrapping my head around the labyrinth that is United’s headquarters in the
Sears Willis Tower in downtown Chicago. Then again, I suppose it made sense that if any company would have connecting elevators, it would be an airline.
United and I had talked about having me come out for a visit before, but it wasn’t until now that all the pieces came together. I found myself on my way to visit headquarters for the first time since I worked there in 2005. (See Part 2, Part 3, Part 4)
[Disclosure: United paid for my flights and hotel]
The scene is completely different than it was back then. In 2005, headquarters was in a terrible, run-down building guarded by angry swans in suburban Chicago, northwest of O’Hare. After moving to a swanky address downtown first, the airline moved the headquarters to join the operations folks in Willis Tower.
The logic of putting one of the largest airlines in the world in one of the tallest buildings in the US seems questionable. The building is a target on its own, but the added glory of taking out an airline and its nerve center would seem to make the target bigger. But that didn’t faze United; the airline is now the largest presence in the building with around 20 floors, each one a little bit different than the last.
I spent my day zipping back and forth between floors, from meeting to meeting with people all throughout the airline. Little did I know that as I buzzed between floors, a handful of execs were packing their boxes. EVP and COO Pete McDonald “retired.” The airline’s revenue management boss Leon Kinloch lost his job. And Martin Hand, SVP Customer Experience for United, was on the retiree list too. I was supposed to meet with him but his name was struck at the last minute. I had no idea that any of this was going on, so to me, it seemed like just another day.
My time started with an 1130a meeting with Praveen Sharma, VP of Loyalty and Business Development. He started with United back in 1999 but he’s been in several different places in the company since that time.
I found Praveen to be a thoughtful guy who was really interested in engaging in debate. (He’s also got a little sense of humor as well. When my pen died, he offered me another one for only 500 miles.)
The Growing Elite Member Ranks
We spent the bulk of my short time with him digging deeper into the elite status question. Over the last few years, the ranks of those with elite status have swelled. Since capacity hasn’t grown, the end result is that benefits (things like upgrades and Economy Plus) have to be reduced for the lower tiers of elites.
I asked Praveen if that was United’s strategy to just get as many elites as possible to lock them in, but he denied that. He said it was just the natural progression. After the Continental/United merger, you had more people flying and earning elite status because of the power of the combined network, so there would naturally be more elites. (The growth in elites started before the merger, however.)
I then rephrased and asked if it was then simply a non-strategy. By United failing to take any action to keep elite rolls from swelling, weren’t they just asking for this scenario to occur? But again, he denied that and said it was just natural.
Regardless, that’s why benefits have had to decrease, but Praveen was very aware that reducing benefits too much means that people won’t value it. It’s a balancing act. And that’s why we’re just now seeing United put more barriers to people earning status, like requiring a minimum spend in addition to miles, to prevent too much of a reduction in benefits from having to occur.
United’s Mileage Devaluation
I had already overstayed my time, but I knew I had to ask one more question. What did he have to say about the big redemption devaluations that happened recently? He first denied that they were really major. But he did say that rates should go up because the onboard product is improving.
At that point, I suggested that they should create multiple redemption tiers if it’s really tied to product. After all, business class on United is very different than, say, Aer Lingus. He acted like that wasn’t possible due to commercial agreements (and not desirable either), but that led into the discussion about why they had in fact created a separate redemption tier for partner carriers. Adding complexity is generally a bad idea, and he agreed. So I asked if it was a change in rates charged by partners that forced their hand. He wouldn’t answer, but I did see a coy smile.
You could tell that Praveen’s job involves a lot of balancing. He knew the importance of people being loyal for many years and he agreed that the airline had to “bear the responsibility” of rewarding that long term loyalty. At the same time, he has to figure out ways to grow loyalty going forward. It’s certainly not an easy job.
After lunch with the PR team, I was off to meet with Scott Wilson, VP of eCommerce and Merchandising. I met Scott back in April at the Phoenix Aviation Symposium and I remembered thinking he was a smart guy. My opinion hasn’t changed.
The $200 Change Fee
Before I could get into my line of questioning, Rahsaan on the PR team told me I had to ask him about his rationale for increasing the change fee to $200. I was happy to.
We talked about how airlines had created refundable and non-refundable fares, and low cost carriers held firm on that. But legacy carriers, trying to be accommodating while sticking with their model, began to allow changes for a fee on those non-refundable fares. So far, so good.
The current change fee had been in place for six years, but fares had risen significantly during that time. So, in Scott’s opinion, it was time for the change fee to increase to $200 in order to remain a similar percent of average fare as it was historically.
That, of course, assumes the value was properly set before and that a fixed ratio is the right way to look at it. I brought up the issue of all those sub-$200 tickets that would now be worthless. Why not use a tiered change fee to allow those credits to be used? Scott said it wouldn’t be fair to give a discount on the change fee to those who got really cheap fares when people who paid higher fares wouldn’t get that benefit. I don’t see it that way, but well, now you have the rationale.
Scott and I went on to discuss the new United.com and apps, but I’ll save that for tomorrow.
I’ve also wondered why airlines don’t tier their change fees; it makes financial sense to buy a nonrefundable intercontinental ticket, add the cost for two changes (one each way) and come up cheaper than a fully flexible ticket. (That sometimes have a small change fee attached too.)
It would make sense to have lower change fees for short-haul and higher change fees for long haul flights. (mileage tiers?)
Cranky, I think that’s the wrong question to ask about the change fee. The question isn’t “why don’t you have a tiered structure so tickets that are less than $200 can be used,” it’s “why don’t you have a tiered structure based on when you make the change.” i.e., if you make a change eight months out, why isn’t that change fee cheaper than making a change a week out? JetBlue recently switched to something along those lines and I think it makes perfect sense – the cost to the airline many weeks/months out is virtually nothing, so why not make a customer friendly move and have the change fees reflect that?
Andrew – Fair enough. I didn’t ask that specifically but he didn’t seem to think that there was room for much creativity in the change fee world. That’s just the impression I got.
Alaska just implemented such a change fee approach as of the end of October — changes are free up to 60 days before a flight. Within 60 days they’re $125.
There’s a lot of room for creativity — and more friendly policies. But that’s not the Smisek approach to running an airline, apparently.
I think you mean, “it wouldn’t be FAIR to give a discount…,” but it’s a nice pun.
CP – Yes indeed. Fixed.
Piling on to what MathFox and Andrew said, I’ve never really understood why airlines can’t adopt the “cruise line” model of tiered change fees. If you’ve ever bought cruise tickets, you’ve probably seen that most are fully refundable, or only incur a very small change fee, until somewhere between 75 and 120 days before departure, and after that, there’s an escalating penalty schedule, until they become fully nonrefundable between 15 and 30 days before departure. Surely the airlines, even with their sometimes archaic IT systems (hello, SHARES), could make something like that work, yet so far, only AS and B6 have experimented with it. I get the argument that if you allow free or cheap changes, people will abuse the system, but why not just put a limitation on the number of changes before the charges start hitting – say, 2 free changes, then after that, you pay the full fee, no matter how far out from departure. I’ve never seen the data, but it wouldn’t surprise me if a good chunk of change fee revenue comes in the last couple of weeks before departure due to business travelers changing plans, and if so, switching to a tiered model probably wouldn’t cost the airlines much, but would generate a ton of goodwill.
My issue with Mr. Sharma’s argument that redemption rates must go up due to increases in product quality. I earn miles to book that award ticket by purchasing tickets for travel on United. In theory, the tickets I buy and the tickets I redeem both reflect improvements in product quality. So I’m already paying for those improvements when I earn the miles.
Scottrick – A very good point. Since the program is mileage-based and not dollars based (for redemption, not elite status), you now have to spend more to get the same number of miles vs 5 years ago. So if you’re spending more to get the miles, then the redemption costs shouldn’t have to go up.
Change fees is where airlines sort of scream out “Hey look how stupid we are”. If you are going to sell a $50 fare and then tell people there is a $200.00 change fee it just sounds dumb. Just say nonrefundable, no changes permitted.
Make your lowest fares use it or loose it types, and then charge $200+ fees for higher fares. Or just go to a percentage for all fares like 10 percent.
Maybe if the lowest fares did not permit a change, some people might buy higher fares that do just in case their plans change. You buy a ticket months in advance and plans can change later after all.
Delta does it with their “basic economy” fares. No changes, no cancellation, no refunds, no seat assignments (assigned at checkin). They’re only available in certain markets; I believe to compete with Spirit and the other ULCCs.
AS has a policy that is fair to the consumer and carrier: no fees for changes/cancellations up to 60 days prior to departure, $125 after that. I agree with Andrew – I would have asked why can’t UA do something similar?
I’m sorry, explain to me you charge 200 dollars to change an electronic ticket? It takes maybe five minutes for a competent res agent to change a ticket. So their time and those awful 800 line fees are worth like 2400 dollars an hour? More than a lawyer!
Remember when they switched from paper to ETickets? Trust us it will be “easier, save paper, no stupid little tabs to put on the carbons” etc, etc. (Have seen all the paper stock that spews out of the ATB printer at the airport when they change your ticket?) I think Southwest has it right, no wonder the public routinely ranks them the best in Customer Service. It’s just another sleezzy money grab by the bean counters none of whom are real “airline” people.
Well, it’s not the actual cost of making the change…it’s the opportunity cost of you holding that reservation, which is why I think a policy of a cheaper change fee further out makes sense. If you’ve held a reservation and change it two days before a flight, it’s going to be much harder for the airline to re-sell that seat than it would’ve if you cancelled six months out.
But chances are you are changing to another flight maybe day later, and so you’re not only paying the change fee, but likely also a significant fare difference. If the change fee is too high, the is the opportunity cost for UA that eh won’t sell that seat at a higher cost that you are changing into,
From the airline’s perspective their product is “perishable.” When that seat is empty any chance of selling it is gone. That is the reason behind the fees. It makes sense if the change is done last minute. I also believe the AS model strikes a good balance. However from a customer view it’s the pits. A good travel agent, as well as the airlines need to educate the consumer that the cheapest tickets are like theatre tickets. Use as booked or lose the ticket. Again, it isn’t traveler friendly but another symptom of modern travel.
Except that analogy breaks down. Many live theatres now allow folks to change tickets. Especially if they’re subscribers.
“Adding complexity is generally a bad idea, and he agreed.”
I don’t have a copy of the organizational chart in front of me, but I’m sure UA, and most airlines, have something called the Department of Complexity (maybe it’s just the Office of General Counsel). “We at UA pledge that if there is a simple way of doing things for our customers, we will do everything possible to stop that it and make things more complex.”
Take a situation where you have to cancel your flights because of emergency hospitalization. OK, I call UA and say, “Please cancel my reservations for the 2 one-way flights because I’m going to be hospitalized, or dead, I’m not sure which.* (*Other comments and conditions may apply and I’ll talk to you later.)
So, I cancel, go into the hospital, survive, and then write to UA as to what to do to use the fare I’ve already paid for and not incur any change fees. I send the documentation and UA writes back, “As a onetime goodwill gesture, I documented a change fee waiver so the full value of each ticket can be used toward future travel.”
Can’t complain about that, but, of course, soon as I re-book (seven months after the original cancellation), here comes the $200 change fee on each ticket.
After much haggling, I got a refund on one $200 fee, but not the other. Much discussion with UA, where I was asked if I had read the emergency cancelation rule. “Well, sort of, but the 12 computer screens are a bit hard to read and understand, don’t you think. A “goodwill gesture,” seems fairly simple, but, well, there I go, using the word “simple” when you’re paid to apply “complex. It’s only $200, but darn it, that’s real money to me!”
I love how you tie in the “Department of Complexity” to the “Office of General Counsel”. Brilliant!
Required skills for members of United’s mmgt: denial, evasion – until the harsh realities of a mismanaged, merged airline can’t be denied (including in the internal perception). And then it’s off to retirement.. At least Smisek got himself some 20 really expensive, nice and gaudy floors to match his suits. Wonder how many underlings will still need to retire before the buck stops at his executive office.
RAW – I have to argue with you here. I think Praveen and Scott were pretty upfront at addressing my questions. There was no effort to deny or evade in their answers.
I wonder what the benefit (and cost to United) is to lease 20 floors of the Sears tower.
So we have to go down, find the express elevator, and then go back up?” I was having a hard time wrapping my head around the labyrinth that is United’s headquarters in the Sears Willis Tower in downtown Chicago. Then again, I suppose it made sense that if any company would have connecting elevators, it would be an airline.
I don’t know what it is about the opening line of this post that I found so amusing. Perhaps it is the fact of complexity mentioned in prior posts. Overcomplexity will cause any organization to become bloated & unresponsive to change. This will cause catistrofic failure at some point.
Sorry if this sounds a bit hyperbolic, but it’s corporate darwinism at is finist & should be a warning for AA & US. Delta semes to have been able to avoid that serious pitfall for the moment, but for how long.
Spelling isn’t your strong talent, is it?
No it isn’t unfortunately, but no need for sarcasm.
I’d be curious to know what the opportunity cost of folks not showing up for tickets that are under water after the change fee? One of the things the airline gains from having people cancel/switch their flight is better operational clarity as to how many people will be flying. When you’re at 70% load factors that really doesn’t matter. But when you’re up in the high 80% and mid-90% that gives you either better understanding of being able to accommodate people, or a better ability to sell tickets and/or overbook appropriately.
Nick – That’s my question as well, and it’s something only the airline knows. You would hope they’d pay attention to this, and they say they do every time I bring it up. But I just don’t know the numbers.
“But that didn’t phase United…”
Sorry to be pedantic, but I assume you meant “faze…”
Henry – fixed.
Another alternative to the change fee is to look at American’s pricing of tickets with their Choice Essential fares. If you buy a Choice Essential fare, you pay a little more upfront (my experience has been averaging around $60) and you can change the ticket as many times as you want with no additional charge. I would be more willing to pay a little more upfront to cover the airlines costs, than to feel like I’m being heavily penalized for having to make a change later. $200 is a lot of money, any way you cut it. If I have to pay that kind of money on a regular basis, then you are encouraging me not to be loyal to your airline. It’s that simple. And by the way, after a million miles flown on United, I am now very happy at American, because of issues just like this.