Jeff Smisek has been gone from United for a long time, but the airline is finally starting to change its strategy in meaningful ways. That's definitely good news for investors, and probably for consumers too.
Roughly 14 months after CEO Jeff Smisek resigned from United Airlines amid allegations he may have tried to bribe a New Jersey government official, his successor, Oscar Munoz, is finally leaving his imprint on the carrier.
Yes, Munoz has kept a high profile since taking over in September 2015, and he has had some successes, including reaching new contracts with many employee unions and winning back customers with a renewed focus on passenger experience. He was in charge when United returned snacks to economy class and he’s partially responsible for developing the airline’s new business class experience, Polaris, debuting on Dec. 1.
But unlike a President-elect, Munoz could not remove every manager on his first day. For the first year of his tenture, many members of Smisek’s senior management team still were running the company. And often, they operated it just as they had since 2010, when United and Continental merged.
That started to change late this summer, with several top executives left the company. Some, like Chief Revenue Officer Jim Compton, retired, while others left for other companies
In their place, Munoz hired what some call a “Dream Team,” of three top executives. They are Scott Kirby, the new president, who came from American Airlines, Andrew Levy, the new CFO, a former Allegiant Air president, and Julia Haywood, an ex-consultant and now the chief commericial officer.
Three months into their tenures, the three executives are starting to leave their stamp on the company, with Munoz’s approval. Gone is Smisek’s relentless drive to reduce costs, often in ways that angered passengers. In its place is a new focus on improving revenues.
On Nov. 15, in the same meeting at which they announced a new Basic Economy fare for cost-conscious travelers, the executives outlined their plans for United’s near-term future. On several matters, they were clear the new United will operate much differently than the Smisek-era company.
Here’s some what the new United is planning.
Nine months ago, after rigorous competition among plane-makers, United decided to add 65 new Boeing 737-700 aircraft, with deliveries starting next year.
It was a surprising announcement, as the 737-700 had fallen out of favor with most airlines. The 737-700 is the smallest version of the aircraft, and most carriers prefer larger models, because they cost less to operate, on a per seat basis, than the 737-700.
The 737-700 is also an older technology aircraft — it started flying almost two decades ago — and while United was believed to have gotten a great deal, it apparently was not enough to persuade new management to keep it.
“We just don’t need those airplanes right now,” Levy told analysts.
United will swap the order for four Boeing 737-800s, a larger version of the same aircraft, and those should be delivered relatively soon. But the other 61 will be deferred for several years, and they’ll come in a bigger model with newest technology.
In the meantime, United may look for other smaller aircraft on the used market.
Focus on domestic Flights
Under Smisek, United had at least one competitive advantage over Delta and American. It was the first carrier in North America to receive Boeing 787s, allowing it to expand into new international markets and improve margins on some existing long-haul flights.
Over the past four years, United’s network planners have had fun scheduling the airplane, adding flights to Melbourne, Singapore, Tel Aviv, Auckland, and several destinations in China, including Hangzhou, Xi’an and Chengdu. Those flights will remain, but increasingly, Kirby wants the airline to focus more on strengthening its domestic route network.
“We built everything on focusing around international, which we do really well,” Kirby said. “But we let the domestic slide because it wasn’t historically profitable.”
In the past, he said, domestic flights underperformed international routes at all airlines because the U.S. industry was deeply fragmented. But now, with far fewer carriers competing for business, domestic routes are much more profitable. Meanwhile, as international carriers grow U.S. routes, long-haul flights are no longer the cash cows they once were.
“It’s a huge opportunity for us,” Kirby said of the domestic market.
A new approach to the hubs
In the Smisek era, United sometimes seemed to avoid competition at key airports. As other carriers expanded in New York, Chicago and Los Angeles, United either more or less remained the same size, or, in the case of Los Angeles, cut its operation.
But Kirby wants United to go on the offensive more, improving United’s share at some hubs. He called out United’s operation at Newark Liberty International Airport, noting that, before the merger, Continental had 30 percent market share there. Now, he said, United’s share is only 26 percent.
Kirby wants United to be the market leader more often. “If you’re not first, you’re last,” he said, quoting from the Wille Ferrell movie, “Talladega Nights: The Ballad of Ricky Bobby.”
Kirby also wants to focus on schedules. At many hubs, he wants to make the connecting schedules more efficient so, for example, a passenger can easily go from Erie, Pennsylvania to Fort Lauderdale with a quick stop at Newark. In addition, he seeks to make schedules more convenient for local business travelers, who might prefer reaching a new cities for a business meeting by 8 a.m or 9 a.m.
Another plan is to use larger jets between major cities. Kirby is commuting from Dallas to Chicago, and he noted that United often flies regional jets on the route. “Its just incredible to me that I am flying on a regional jet between two big cities likes that,” he said.
Adding seats to planes?
United’s last management team figured it had done all it could when it came to adding seats on planes. In the past two years, United has installed new, slimmer seats on many of its aircraft, adding a row or two in the process.
But the new executives aren’t sure the old group went far enough. Levy said the carrier is calculating whether it might be able to add more seats, which, theoretically at least, could help the airline lower fares.
“It’s a very profitable way to grow the business and carry more customers,” he said. [Ultra low cost carriers] have shown there is a huge market with price-sensitive customers to buy a product that has less room in the seat. The proof is in the pudding.”
Even with the slimmer seats, United’s Airbus A320s have 30 inches of pitch in regular economy.
“They carry millions of customers around the world at 29-inch pitch or less,” Levy said of the low-priced competition. “I think we have to accept the fact that there are a huge percentage of our customers as well that are willing to make that tradeoff.”
More Detailed Revenue Management
Most airlines have a simple goal with their revenue management systems — to maximize the revenue the carrier makes on each flight. Sometimes, that means the airline wants to sell every seat, but other times, that’s less important.
Ideally, a computer software guides an airline into making the right decisions about which passengers it carries at what price.
But when Kirby arrived at United in August, he realized United’s revenue management system, built in 1997, lacked the functionality needed by a major global airline. In many cases, that has forced United employees to make key decisions, and while United’s employees are good, Kirby said no human is as sophisticated as a computer.
Kirby is seeking to upgrade the platform so it can make better decisions.
One change Kirby will make is relatively straight-forward. United’s current system retains only two years of data on ticket purchases, which means United often does not have the historical data it needs to predict future demand. That’s a problem this Christmas, Kirby said, because it falls on a Sunday for the first time since 2011. United does not have data from 2011, so it is having trouble predicting how to price flights this year.
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Photo credit: United Airlines is finally starting to make some real decisions under new management. United Airlines