United Airlines’ Collateral Damage
By Robert Mark on May 6th, 2008If I were a United Shareholder …
Still trying to recover its corporate composure after a stinging slap in the face last week from Continental, United Airlines is now turning its focus on US Airways as a potential partner to reach the holy grail of corporate success … increased shareholder value.
Continental would have been a good fit, at least for United. Luckily for Continental, their managers were smart enough to run while they still had the chance however, because I think they smelled the blood in the water.
Rumors floating around the industry about this new US Airways merger run the gamut … that a desperate United, on the verge of another bankruptcy filing, is seeking a leadership bailout from a more stable carrier or that United’s employee groups will do everything under their power to oppose this joint venture because they already see another train wreck ahead … and they should know.
Employee relations have been terrible at United for almost as long as I can remember, certainly back before the 1985 pilot strike when the airline hired a few hundred new pilots in the face of those on the picket line, a decidedly poor decision when you have a collective bargaining agreement in place.
Employee chaos isn’t limited to pilots, although they often seem to garner most of the publicity. Mechanics watching many of their jobs being outsourced are angry and flight attendants still remember they were excluded from the Employee Stock Option Plan a few decades ago.
Left Holding the Bag
But if I were a United shareholder I’d be asking why those folks at Continental left us standing at the altar.
Here’s are a few thoughts.
Let’s place the responsibility for the state of the airline where it rightly belongs, with United’s management team, the same group that managed to push another few bits of bamboo under employee finger nails this week when the airline set aside another $130 million worth of stock for executive pay incentives management believes it needs in order to attract good management talent.
“Hello … Earth to United, Earth to Glenn. You’ve had oodles of bonus money for years and you still don’t seem to be able to hire executives that can get everyone working together smoothly.” That is supposed to be the point of all this cash, isn’t it? And shareholders seem to stand idly by while Glenn Tilton keeps talking about what he’s going to do to solve employee relations problems. It’s time for a little beef.
A good airline … a good company … is a balance of truly talented, dedicated people willing to give as good as they take. Employees at United want to help run a good airline. I think even they have given up on the words “great” and “United” being used together in the same sentence.
Bad Attitudes
Most of us on the outside think customers are the only group paying a price for poor management at United, but employees do as well. And miserable employees repeatedly passed over for any share of the pie often unknowingly avenge their angst on passengers which ultimately hurts United’s reputation in the marketplace. That drives down share prices.
Is there any guarantee that United would be profitable right now if it had better labor relations like say, Southwest Airlines? Of course not. But we’ll never know for sure will we.
If I were a United shareholder, I’m sure I’d be demanding top-notch value for my investment too.
But after 20 years of watching the swinging doors at the top, I’d have to be asking myself why United is either unable or unwilling to understand that workers who feel as if they are fairly treated will deliver more than a fair day’s work.
I’d also have to admit that as a shareholder, maybe I’d been complicit in the current state of my own company. And maybe, just maybe I’d start demanding a management team capable of delivering more than just talk about changing this beleaguered company.
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May 6th, 2008 at 4:17 pm
Great post! Too many airlines seem to have adopted the universal principle that the mission of the business is to return shareholders’ investments without remembering that each business has a mission through which they make those returns, and in this case, it’s transporting people and cargo swiftly, safely, and efficiently from one place to another. Southwest makes its mission clear, and it enlists employees in that mission, and travelers notice the difference when they fly WN. United’s management (and that of the rest of the airlines) does not instill its employees with that mission. They are so concerned about the return-on-investment mission that they neglect the travel mission, and then the return-on-investment mission is necessarily compromised.
May 6th, 2008 at 6:29 pm
Certainly making money for everyone is the goal of all businesses. But as you said Evan, the folks at United have completely lost sight of why they’re in business. That’s not a new attitude however.
Following close on the heels of your point was one someone asked me in a private e-mail a minute ago, “So you think if the employees ran everything at United it would all work out? They had their chance and they blew it.”
No, I don’t honestly think airline management needs to be this black or white … them or us. United management however is a great case study for how to turn thousands of employees into anti-company people, I think.
As you rightly point out, despite the critics, Southwest continues to make money, year after year. And by and large, customers like flying on Southwest because they get us there pretty much on time.
These days, I don’t really expect much more than that anyway.
May 6th, 2008 at 11:17 pm
I don’t think any airline is going to be profitable with Jet-A at $3.50 a gallon, no matter how low their other costs or how good the employee relations.
Southwest does well because they hedged their fuel contracts and paid less than other airlines for a long time. For this year they are hedged at $49/barrel. But even Southwest’s management admits that these contracts will soon end and they’ll be in the same boat as everyone else.
Sure, they have the benefits of good management, single aircraft type, and so on. But in the end, fuel prices will claim every airline unless we start seeing $800 fares for an L.A. to Las Vegas flight, *or* lower oil prices.
Just my $0.02. :)
May 7th, 2008 at 12:38 am
The hypocrisy of rewarding executives excessively handsomely for driving a company into bankruptcy, demoralizing the employees, and pissing off the customers is what makes me mad.
There is no evidence they are paying for talent. The evidence is that they are stealing all they can get away with before they leave for somewhere else. It’s not just United, this is a sick trend throughout American big business.
May 7th, 2008 at 12:09 pm
Good article, but not entirely accurate. The F/A’s at United were not kept out of the ESOP. Their leadreship refused to participate in the ESOP because they were not willing to contribute to the shared purchase of stock. This incresed the cost to the remaining perticipants and may have contributed the eventual failure of the ESOP. Just as management has not participated in the most recent shared sacrifices, the F/A’s did not share in the costs(sacrifices) of the ESOP, but did expect to share in its successes.
May 7th, 2008 at 12:21 pm
That’s a very interesting point Tom. All this time I’ve been told the F/As were kept out.
But the way United is headed even now, I seriously wonder whether the F/A involvement in the ESOP would have made much difference.
Management grabbed the first opportunity possivble to pass all those pension costs on to the taxpayers as well.
As Bill said a minute ago too, this kind of behavior is reprehensible.
And even with all these special deals, they’re still in deep toruble … and giving the executives milions for their talents.
May 7th, 2008 at 8:57 pm
Every time Mr. Greenwald made a gesture to the F/A’s to gain their participation, they threw it back in his face, or I should say their MEC Chairman did.
The AFA MEC Chairman at United was on a real power trip. He was out to prove that he could be stronger than the CEO.
If Greenwald made a concession to him, he would demand more. Greenwald would take one step forward and the AFA Chairman would take two steps back. Every employee group was on board but the F/A’s.
It would have shortened the pay concessions for the whole airline from five years and nine months to just five years. Everyone endured nine months additional pay concessions becuse the front line employees (F/A’s) were not owners.
I don’t now how much you know about Mr. Greenwald, but he is a very smart businessman and knew that was not a good idea and did everything he could to bring the F/A’s on board.
We will never know if their participation would have made a difference, but don’t believe that the F/A’s were prevented from joining the ESOP by the company.
Oh well that is history and now we have Tilton, who would not have even cared if the F/A’s were a part of the ESOP.
We can thank the IAM for Goodwin, the weakest CEO in airline history. We we can thank Goodwin and the IAM President Peterpaul for the failed attempt to buy US Airways the first time.
Goodwin and the flunkies that Steve Wolfe left behind ran United into bankruptcy.
May 7th, 2008 at 9:34 pm
The top five at Southwest made 3 million dollars less than Glen last year…and they believe it is the EMPLOYEES that make Southwest GREAT! At least that is what they say publically…
May 9th, 2008 at 11:16 am
As I have read and listened to the discussion of airline profitability and Air Traffic Control (ATC) problems, punctuated by bankruptcies, delays, congestion, meltdowns, etc., I have concluded that the problem, and therefore the solution, lies outside the current industry focus.
Contrary to conventional wisdom, the biggest problem facing the airlines is not fuel, labor, hub schedules or even ATC. The airline’s biggest problem is production variance driven by unmanaged complexity.
In reality, the airline curb to curb production process is a highly complex, interdependent flow of materials where, today, each of the elements in this multi dimensional material flow is managed independently, without regard to system effects. This leads to 40% to 50% of the airline product delivered late, which represents a huge production problem punctuated by high costs, low quality and dismal utilization.
Given this perspective, the application of “just-in-time” manufacturing processes can yield rapid (2 years) and significant (hundreds of millions) bottom line benefits to network airlines.
Airlines must tactically work to move the right part, to the right place, at the right time. And it must do this constantly, hour after hour, day after day, month after month. Starting with the movement of their aircraft, the airline’s primary production process, airlines must recapture tactical control of their curb to curb production process.
The payoff from this approach is huge. As can be seen below, the cost for just crews, fuel, defects and lost opportunity cost to accept an unacceptable amount of “variance” (17 minutes per flight) for a medium size hub airline (1,500 flights per day) is staggering.
Attila™ Airline Cost of Poor Quality Analysis
Crew, Fuel, Defect and Lost Productivity Costs
Annual Crew Buffer Cost $54,293,750
Annual Defect Rework Cost $21,352,500
Annual Overnight Rework Cost $32,028,750
Annual Fuel Buffer Cost $313,671,875
Annual Aircraft Lost Productivity Cost
$1,559,006,250
Total Annual Buffer/Rework Cost
$1,980,353,125
Add in the other “just-in-case” buffers airlines add into their operations, as well as the negative effects to business productivity / GDP and the overall costs gets very large, very fast.
And while most continue to blame ATC, weather, fuel and a host of other problems, I have realized that most of this $2 Billion cost is actually production variance. Further, like Toyota, GM, Ford and others who have applied modern production techniques, 50% of these “variance” costs can be removed by the rethinking of the airline’s internal processes.
Ultimately, the airlines must take responsibility for the success of their business operations. Airlines must understand and verbalize that FAA is not relevant in the current discussion of delays and congestion. FAA’s solution is 10 years away at best.
Finally, the solution lies in Operational Excellence. Following in the footsteps of Wal-Mart, Toyota and others, within 2 to 3 years airlines have the ability to improve on time arrival zero to greater than 75%, while decreasing block time 5 minutes per flight. And airlines can do this with no change in the weather or ATC system.
Michael Baiada
May 9th, 2008 at 12:22 pm
I think we should keep pursuing a merger with Continental Airlines, and not go for U. S. Airways, which would be putting good money after bad. Let’s stop beating a ‘dead horse.’
May 9th, 2008 at 12:38 pm
I admire the attempt at squeezing maximum efficiency out of an airline’s operation, but there are a lot of variables over which they have no control which can cost an airline billions of dollars over the course of a year.
I just don’t see how fuel costs can be discounted. If fuel is 15% of an airline’s cost and a hedge expires in a rapidly escalating market, fuel can suddenly command 20-25% of the cost. Maybe they can see it coming, but they cannot do anything about it.
There are so many variables nobody can predict which all have massive costs attached to them. For example, an FAA action such as the ones against Southwest and American can cost millions per day in lost revenue, added costs, and poor publicity.
What system can compensate for a runway or airport closure at an airline’s hub during a morning or evening push? Suddenly 100 flights have to divert elsewhere, with all the associated costs and disruption to the system. The ripple effects of this sort of thing can last for days.
Delta’s EPS is negative $10 at the moments as I recall. I’m not sure any efficiency program can fix losses on that scale.
May 10th, 2008 at 12:57 pm
great post / the key is what you mention re: fire-hosing cash at people who continually underperform .. it is almost better to hire the “future rockstar”.. pay them below crazy CEO levels… and set clear objectives that are conditions of their employment.. this is essentially how all boards should think… but then again.. not all boards have folks on them that are prepared to make tough, non-conflicted and logical decisions … the best example to follow.. is to look at the governance at Southwest, the labor relations.. the whole gambit