United CEO: Flying With ‘Subpar Product and Subpar Schedules Doesn’t Work’

United Airlines irritated key customers when it tried to shrink itself to higher profits under its previous executive regime, often flying smaller planes on competitive routes and dropping flights in business markets, CEO Oscar Munoz told employees recently, according to a video of the event obtained by Skift.

That strategy produced some dubious decisions, Munoz said, such as flying noisy 37-seat turboprops several times a day between United’s hubs at Newark and Washington Dulles. Nearly every other airline flies large jets from hub to hub.

“A business customer will stay with you for a little bit of time,” Munoz said during a Jan. 23 question-and-answer session at United’s Dulles hub. [“And then] it’s just ‘I can’t do this anymore.’ And so now you’ve lost that market. And seats between important locations like [Dulles] and let’s say New York have decreased, versus everybody else increasing. They built a market. We gave away a market. But yet we still try to play in it with little aircraft like little kids. That doesn’t work.”

Turboprops will stay on the Dulles-Newark route for the near future, because it takes some time to get the right aircraft flying the right routes. But eventually, United plans to use its smallest regional jets and turboprops the way it competitors do— to fly passengers from small cities, like Charleston, West Virginia, to its hubs.  Elsewhere — where passengers have many more choices — United will improve its product to attract business travelers.

Now in his second year at United, Munoz told employees he expects his airline to be smarter and act more like its main rivals, Delta Air Lines and American Airlines. Both competitors have grown recently in larger markets, adding flights on bigger aircraft cities like Chicago, Los Angeles and New York. Meanwhile, on many domestic routes, United has shrunk or stayed the same size.

Munoz acknowledged using smaller planes on less profitable routes may seem prudent, but said in the long term, the strategy rarely works.

“It’s a self-fulfilling cycle,” Munoz said. “You’re flying large aircraft and you’re not making money so you start doing things. Eventually it leads to you start dropping price. [Then,] you’re not making money so you down-gauge”

He promised United is dropping that approach.

“We fully understand that flying to business markets with subpar product and subpar schedules doesn’t work,” he said. “There’s a reason why you don’t make money — because no one likes to fly it.”

Bigger Aircraft

In early 2016, early into Munoz’s tenure, United announced it would add 65 Boeing 737-700s, with deliveries beginning this year. But he said it soon became apparent the jets had two major flaws — they’re the smallest Boeing makes, and they’re based on 20-year-old technology.

So in November, after CFO Andrew Levy and President Scott Kirby joined the company, United said it would defer 61 of the orders for the foreseeable future. And the four planes United will take instead will come as Boeing 737-800s, a larger aircraft.

“It’s simply adjusting very expensive acquisitions to make sure they are are going to be with us for a long time, and we don’t wake up with a lot of aircraft five years or 10 years from now and somebody says, ‘What the hell did you buy these for?’ Munoz told employees. “These are assets that are with us for many, many years.”

Munoz said United is evaluating two alternatives. It might ask to trade the orders for the Boeing 737 Max, a new technology aircraft hitting the market this year. Or it might instead ask Boeing if it can take wide-body aircraft for long-haul flying.

“Boeing is great and flexible,” Munoz said. “By and large we can work those things out. We haven’t actually determined what we what to do and we want to get our board involved.”

Bloomberg recently reported United is in similar talks with Airbus about United’s order for 35 Airbus A350 widebody jets. Those planes are supposed to start arriving next year, but Levy told the news service United may want to trade them for something else.

Investing in Dulles

Munoz also acknowledged United had considered closing its Washington Dulles hub, which has higher costs than other airports and needs between $100 million and $2 billion in infrastructure improvements. But Munoz said United kept it because closing a hub is “…the wrong thing to do if you want to be a business that’s enduring.”

In September, after Virginia agreed to spend $50 million to help reduce airline costs at Dulles, United signed a new lease running through 2024. But United is still deciding how the hub will evolve. United has historically used Dulles as a trans-Atlantic gateway, rather than a domestic connecting hub, though that could change, Munoz said.

Over time, he said, the facility will need improvements, but the process will be slower than many employees might like.

Munoz chided the airport’s administration for building what airport employees call, “the train to nowhere.” Since 1986, United has operated out of what Dulles considers a “temporary” terminal. As a result, in 2010, when the airport built a train to shuttle passengers among terminals, it did not put a stop at United’s current terminal. Munoz noted the airline is paying for a train many of its passengers cannot use.

“Someone told me today that, every single day, we are paying $5 per passenger to fund the train that goes nowhere,” Munoz said. “It pisses me off to no end, because it’s just money that could be used in so many different ways if we wanted to do the right thing here.”