After again blaming the carrier’s troubles on integration challenges after the 2010 United Airlines-Continental Airlines merger, United’s senior executives outlined a series of a initiatives Tuesday they said will help woo back lucrative business travelers and increase earnings.
“We lost share in our domestic markets, and as our capacity shrank in the four years following the merger,” United CEO Oscar Munoz said on a conference call with analysts. “A combination of all these factors led to a declining share of premium customers, which in turn contributed to our consistent underperformance to peers. Acknowledging where we went wrong is an important step in our recovery.”
Munoz, who took over from former CEO Jeff Smisek in September 2015, has much work ahead. Before the merger, United was often among the industry’s better revenue performers, with the carrier regularly earning more from ticket sales than competitors. However, Delta Air Lines is now the clear revenue leader, with its CEO recently saying it earns a 10% premium compared to competitors’ ticket sales.
According to analyst Hunter Keay at Wolfe Research, United earned a 6 percent in margin in 2011, when its peers, Delta and American Airlines, earned a combined 3 percent margin. But in 2015, Keay said, United’s margin was roughly 15 percent, while peer airline produced 17 percent margins. In 2014, the margin gap was even worse – about five percentage points.
“Myself and the entire leadership team recognize we have performed up to the level of our own expectations or frankly in line with our peers and that is simply not something that is good enough for us, or for anyone,” Munoz said.
On Tuesday’s conference call, Munoz explained several initiatives he said would produce $3.1 billion in incremental value by 2018 and help close the gap.
Many are common in the airline industry, and implementation is already under way. The initiatives include making United’s operation more reliable, selling more Economy Plus and first class seats, adding an inexpensive entry level fare class for price sensitive customers, reducing the airline’s reliance on smaller, less efficient regional jets, and streamlining maintenance.
But the real goal is to sway United’s most profitable customers to return. While the airline’s load factors remain high, United’s executives suggested some high-value corporate customers have left for competitors. Munoz said some of these customers were turned off by United’s operational challenges, with the airline having trouble delivering passengers on-time until 2015, when United made reliability a focus.
“As our operation struggled, we damaged not only the trust of our employees, but also of course our customers,” Munoz said.
To try to regain these customers, United also plans to examine how well its schedule caters to business travelers, who tend to prefer more frequencies, allowing them to fly when they want. Since the merger, United has shrunk in many hubs, making its schedules less useful to some corporate traffic. An exception has been San Francisco, which United has been growing. It has been performing well, the executives said.
“With lower seat share and less capacity in our hubs, the schedule quality we offer customers has deteriorated over the last five years,” said Jim Compton, chief revenue officer. “This combined with the operation challenges faced contributed to the erosion of our [revenue] premium.”
With some tweaks to the product and schedule, Munoz predicted the business customers will be back.
“We need to grow our share of premium customers by further improving our schedule, product and customer experience,” he said.
Some analysts, including Keay, have suggested United rethink its hub structure and perhaps shrink at airports where it is no longer in a dominant position, such as in Los Angeles, where it has lost share to American and Delta. But Munoz said it it was too early think about the future of hubs, promising only that the airline would work to “refine our mission,” for all cities.
United has hubs in some of the nation’s most important business markets, including Los Angeles, Chicago, San Francisco, Houston, Denver, Washington, D.C., and the New York area, and the airline suggests this will be helpful going forward, as all the markets have considerable revenue potential.
“Our strong presence in business cities and the positions of our international hubs are major advantages for United,” Compton said. “However, we are not using them to their fullest opportunity.”