|Six Steps to Success for United Airlines|
Now that United is in bankruptcy, it admitted that rather than $7 million, it is actually losing $20 million every day!!!
United's strategy to turn itself around lies not in the cost cutting and service reductions that it is threatening, but instead on adopting the adage 'you have to spend money to make money'.
United has a long and proud history as an airline. This is now at risk unless it makes urgent and drastic changes.
With a new CEO from outside the industry, and moving into bankruptcy; United now has an exciting opportunity to cast off its mistakes of the previous decades and previous managements.
Amazingly, it is easy to boost profitability in an airline (due to the massive profit that each extra passenger generates). United's solution to its present problems primarily lie in building its passenger numbers, not in reducing its costs.
Here are six steps United should take to return to profit.
Note that although this is written with United in mind, many of the comments apply equally to the other 'Big Six' high cost airlines that are precariously close to joining UA in bankruptcy.
Frequent Flier Program Enhancements
Frequent flier programs are intended to be 'loyalty' programs. But one of United's biggest present problems is that many customers are switching airlines due to concerns about the future integrity of United's frequent flier program (Mileage Plus). Paradoxically, United's frequent flier program is acting as a disloyalty tool rather than a loyalty tool!
United needs to urgently stem this loss of valuable frequent fliers. They can do this by adding a new type of mileage override - 'loyalty miles'.
United should announce that all future flights will earn both normal miles and also an equal amount of 'loyalty miles'. These loyalty miles will be added into the member's regular account twelve months after each flight, conditional on them having flown another United flight in the six months immediately prior to that date.
United should also offer every account member a 10% 'loyalty interest payment' on their mileage balance as of (perhaps) 31 Jan 2003, with this payment also to accrue as a loyalty bonus.
These two steps will encourage people to keep their account balances rather than urgently trying to convert them into tickets as part of an abandonment of the Mileage Plus program, and will also make Mileage Plus the most generous program in the sky with the double mile loyalty bonus. Best of all, people have to keep flying United in order to redeem their loyalty bonus, and because each extra flight increases their future loyalty payments, it acts as an ongoing and continually strengthening loyalty tool.
United can afford this. I remember, in the late 1980s, when they were giving away triple miles for an entire year! Miles cost almost nothing to give away, but lost customers have an enormous opportunity cost that United definitely can not afford.
Fair Schedule Cuts Policy
Many people are prudently reluctant to book future flights on United, for fear that United might suddenly announce the elimination of their flights - perhaps the day before they are scheduled to depart (or, worse still, while they are traveling, stranding them thousands of miles from home). These concerns can be eliminated if UA makes three public undertakings.
(a) All flight cuts will be announced at least six weeks prior to their occurrence.
(b) Affected passengers will not only be offered a full refund on any tickets, even if only one of many flights in an itinerary is cancelled, but also will be awarded loyalty miles for the itinerary, even though they can no longer fly it.
(c) Passengers that rebook onto alternate UA flights (rather than other airlines) in the case of flight cancellations will be given double loyalty miles as a thank you for their loyalty.
This means that people can book future flights on United with confidence, knowing that if a schedule cut should affect their plans, they will have six weeks to make other arrangements, and that they will be not only fully refunded their original ticket cost but also generously compensated for the inconvenience as well.
Enhance Service Quality
Yes, go ahead and spend more money on enhanced services! United's problem is only partially too high a cost base. Indeed, let's be specific about this. The only costs that spiraled out of control were their labor costs! Actual customer service costs have always been low and are an infinitesimal part of their overall operating cost.
The largest part of its problem is that people no longer want to fly with them. Forget about 9/11 and fears of terrorists - Southwest and JetBlue are carrying more passengers than ever before. People just plain don't like flying with United any more - the combination of increasingly draconian restrictions on tickets, matched with steady reductions in service and still-too-high fares has eliminated any reason to choose United over the new breed of low cost carriers.
And now, here's the key financial issue that United has overlooked. Airline ticket sales are hugely high margin items (for the airlines). One extra passenger, paying (eg) $300 for one extra ticket, represents about $270 in immediate extra bottom line net profit ! And, on the other side of this coin, every $300 passenger lost impacts another $270 on their bottom line loss.
What is the point in saving $5 in costs if that means you lose a potential $270 profit? United has almost literally 'saved itself to death'! And, on the positive side of this equation, even the lowest fare paying passengers are very valuable. Surely paying another $10 per passenger and providing enhanced services to encourage them to fly makes great sense? I'd sure spent $10 if I thought it would bring me a $270 return!
Here are four examples of low cost services that will encourage people to fly, and which will encourage people to preferentially fly United.
These types of actions will encourage passengers to come back to United, and to return to their earlier more regular flying habits in general. Best of all, the extra costs involved are minuscule and will easily be repaid in the form of extra paying passengers.
Put Planes in the Air
There is an industry saying that planes should only ever be 'fueling, flying, or fixing'. With new planes costing $100-200 million a piece, it is essential to get the maximum value out of each plane.
United has parked ten nearly new latest generation 747-400s in desert storage and are talking about parking more. But at the same time, they turned around and spent $1.3 billion to buy 13 more 777s. They say that they can't fill their 747-400s and so are replacing them with the smaller 777s.
This is absolutely crazy! $1.3 billion? Give those planes back to Boeing, now - Boeing is already half expecting United to do this! Don't give up on the marketplace. Compete! Or, at the very least, if you don't need planes, sell them, don't store them and watch them lose their value while tying up precious cash that you desperately need.
Fly those 747s - discount the heck out of some fares to fill them, if necessary, but get them (and more passengers) in the air. Or release more seats for frequent flier awards - give Mileage Plus the reputation of having liberal allocations of seats so members can actually cash in the awards they have earned.
United has already bought and paid for these planes. It makes no sense to now park them while buying brand new replacements.
And, with all the other high fixed costs of running its operation, every time it cuts back on its capacity it makes it more difficult to spread its fixed costs over the fewer remaining flights and seats it operates each day.
Some things are not a mystery, and have been proven time after time in the marketplace. One such obvious fact is that discount airfares bring people back onto the planes. Cheap fares increase the number of travelers - they always have and probably always will!
United has the yield management tools to be able to selectively discount fares without destroying its higher yielding traffic and to truly sell 'top up' fares to fill up the unsold seats on its planes. It should do so, rather than replacing its planes with smaller planes and fewer flights.
When the underlying cost of a roundtrip ticket is something like $10-20 max, now is not the time to be bashful! United should go 'wild and crazy' with new types of fare discounts, making full use of all the modern methods of selling tickets (as well as all the traditional methods, too!).
For example, why not have 'two hour prior' standby fares that will allow a passenger to fly on any flight for a low fare (maybe a mileage based fare, ranging from $50 to $100), based on available seats, two hours prior to each flight's departure?
Why not join with some travel wholesalers and offer 'mystery flights' - passengers go to the airport where they will be given a two or three day vacation to an unnamed destination. These have been hugely popular elsewhere in the world - there is no reason why United couldn't copy this concept in the US, too.
Sales Force Reorganisation
United have hired management consultants - at a cost of $1.5 million a month - to help them reorganise. Press reports suggest that these consultants have so far come up with two ideas, one of which is very wrong, and one of which is only half right.
The consultants suggest that corporate discounts to companies giving United lots of business can be reduced. Bad move! With nervous clients just looking for an excuse to switch carriers, now is the very worst time to try and put the screws on! Don't touch discounts (yet!).
Secondly, United was advised that maybe it has too many sales reps at present. Reps currently handle, on average, only ten corporate accounts each. The consultants said that a rep could handle 40 accounts. Yes, this might be true, but don't use this as a reason to fire three quarters of the sales force! Instead, incentivise them, motivate them, set them with fresh goals, and give them the tools and responsibility so they can then each go out and increase their client base fourfold.
And now, what about travel agencies? Why not pay them - not the old fashioned across the board way for passively taking orders for tickets you would sell anyway - but instead, pay them for actively steering more business your way! Give them commissions based on their ability to sell a greater percentage than your normal market share of tickets - you already have the analysis tools to enable this, and you used to offer these types of bonuses. Give travel agents another chance to prove their value to you!
United Can Succeed
United has a rich network and all the resources to be successful. But its success is not guaranteed. It will require a willingness to think outside the box, and to truly offer added value to its prospective passengers.
Although in dreadful shape today, success is very close at hand. Even a simple 10% increase in passengers would bring it another $1.5 billion in annual revenue, most of which would be net profit.
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written 13 Dec 2002, last update
21 Jul 2020