In 2018, United Airlines appointed Josh Earnest, adviser to former President Barack Obama, to lead its communications efforts. Since then United’s communications have become much more professional and CEO Scott Kirby appears to have benefited greatly from improved public appearance performance. United has taken leadership positions in managing the pandemic and led the industry on announcements of innovative, forward-looking investments like supersonic transportation and electric aircraft.
Living in the Washington, DC area and generally following politics, much of what United does resembles what happens in our government. By saying that, I mean intentionally using distraction to focus a narrative on a specific target while avoiding more difficult issues. This shiny object tactic can help focus an organization and excite investors. Just recently, the airline threatened to withdraw service from New York’s JFK airport unless it was granted more regulatory access. United operates a large hub near Newark Airport, and JFK accounts for a tiny fraction of the airline’s production. This effort to gain more access to JFK after abandoning the airport in 2015 is the current shining object. The airlines are not the government, and underpinning that approach are five serious issues that United should be thinking about but not being talked about much.
Lack of hub dominance
Business travellers, although traveling less frequently since the pandemic, appreciate non-stop flights and their frequency. When someone else is paying for the ticket, such as a company, other service-related characteristics become more important in airline choice. Delta Airlines effectively has no competition for business travelers from Atlanta, Minneapolis, Detroit and increasingly New York’s LaGuardia Airport and Seattle. That’s because, at each of these locations, they offer service to more cities and more often than any other competitor. It’s important to note that no competitor is even close at any of these locations either, although Alaska Airlines is trying to hold its own in Seattle. This local hub dominance, a word lawyers hate to use, gives Delta a decisive advantage over its major competitors. American has positions similar to Delta, but does not reach as many commercial customers as Delta, in Dallas, Washington National Airport, Charlotte and Miami.
United only has this position at Houston Intercontinental Airport. Their other major hub positions — Newark, Chicago, San Francisco and Denver — each have significantly more competition than Delta or American’s hubs. Chicago is basically split between United and American, and Southwest has a large operation at Midway Airport. Denver is used as a hub by Frontier and Southwest, giving United competition in nearly every destination it serves. Newark is New York’s only major commercial airport without slot controls, making it a place where low-cost carriers, including even Allegiant, keep adding fights there. In sum, United has competitors for almost every one of its customers, which Delta and American need not worry so much about. No shiny object will fix it.
United have a long history of acrimonious labor relations. People who say strong unions come from weak management often use United history as a prime example of this. To his credit, CEO Scott Kirby has said the right things and seems to realize that partnering with his employees is a good track record. But inertia is a tough thing, and many airline employees are geographically dispersed, making communications even more difficult.
This difficult history complicates a current period where pilots are hard to find and salary pressure affects many roles in an airline. Labor, which typically accounts for 30% to 35% of total costs, is expected to reach over 40% of costs. Airlines, including United, must find ways to mitigate this while keeping the labor pool engaged and motivated. While every airline has these current labor issues, at United their history makes solving this problem even more difficult.
Structural loss of business travel
In recent earnings calls from major US airlines, the companies put a good focus on the business travel environment. While reporting business travel volumes at around 75% of 2019, they pointed out that corporate revenues were back to, or close to, 2019 levels given the higher fares. They also suggested business travel is still recovering and hinted it would return to pre-pandemic levels.
But this optimistic outlook doesn’t match the way most think. Reasons such as video conferencing options, personal risk avoidance, ESG concerns, cost containment, etc. are pushing many companies to rethink the role of regular travel. Leading consultancy Bain has pledged to travel 35% less as part of its ESG initiatives. Others say there are fewer places to visit with the new work-from-home protocols. These trends suggest that the recovery curve is likely flattening for businesses and stabilizing at around 80% of 2019 volume.
Airlines like United are designed to carry business travel, and it affects every aspect of their business. The network, fleet configuration, loyalty program, airport real estate, staff training, IT, etc. are all influenced by the volume of business travellers. If the 80% threshold is accurate, it will have significant implications for United and other airlines built like them.
Uncompetitive cost structure
United, along with its counterparts Delta and American, have the highest unit costs among US airlines. There are many reasons for this, but the most important is the relentless search for business customers paying higher rates. It affects every part of the business in a way that I didn’t even appreciate when I worked in this type of airline. Here is a simple example. Suppose an airline generally charges for checked baggage, but waives these fees for certain customers based on the fare paid, frequent flyer status, or credit card benefit. This simple feature changes the way an airline should train its staff, as an agent will need to recognize which customers benefit from the fee waiver. It also changes airport IT, as the agent needs to be able to print a bag tag for some customers without payment but confirm payment for other customers before printing the tag.
This small example is easy to solve, but multiply it by each airline process and it’s amazing the complexity and cost it adds. Track this complication in fleet, seat configuration, airport real estate needs, and more and soon you’ll be talking about measurable increases in unit costs. The result is that airlines like United can sell low fares, but make no money on the low fares unless they are subsidized by others paying higher fares. Now, Southwest at Chicago’s Midway Airport or JetBlue at JFK have a real impact on United hubs in those cities, as discretionary customers will often choose an alternate airport to save money. In a world where more passenger volume comes from price-sensitive customers, the current cost structure of United and similarly structured airlines is not competitive.
A product that is not pleasant to drive
Even if the other four things on this list weren’t a challenge, United isn’t a particularly friendly airline to fly. Hop on a Southwest, Alaska or JetBlue flight and you’ll feel like they’re happy to see you and want to make the trip enjoyable. Board a United flight, and though it may happen, you will be treated with indifference at best and animosity at worst. Depending on price or timing, United may be the best option available. but many customers will choose another option if they have one. It’s hard to change, and the long history of workplace friction makes it even harder. United have long ceased to call themselves “the friendly sky”. The pandemic has encouraged major airlines to offer early departure programs to some of their most experienced employees, which may create a unique opportunity to drive serious changes in product delivery.
United is a proud and strong American airline that plays an important role in the national aviation landscape. As they did during the pandemic, they can play a real leadership role on certain things. They have strong leadership, including CEO Scott Kirby. Still, continual announcements about things that won’t happen for many years, or complaints about the airspace limitations that United enjoys in other geographies, are okay if it doesn’t distract from the company of key elements that really threaten its franchise. Based on their current communications, it’s hard to say.