We’ve all seen the statistic; Airlines For America (a U.S. airline trade organization) is predicting 2.4 million passengers per day this summer in the 91-day period between June 1st of this year and August 31st. 332,000 of those enplanements are going to be international. Obscene!
Great for the industry. Yes. But be careful what you wish for.
At least, if you happen to be United Airlines. Things do not seem to be matching up with their peers over there? What’s going wrong?
Let’s start with the most recent on-time statistics for United for the month of June. 42% of flights in the United system departed without any delay. Amazing! Especially when their internal goal was 52%. Again, all this is fine in a vacuum- there are things like bad weather, known unknowns, and the like; except it trails its two largest competitors by a large margin.
Delta’s on-time performance for June was 66%, American’s was ~60%, and even Southwest was 53%. This is, of course, last month’s data. This month’s will have the blip of United’s router failure that knocked every flight into at least a two-hour delay on July 8.
It gets worse, though. Read any frequent flyer forum – even when people are trying to be objective and mention on-time departures, it paints a grim picture of the airline’s reliability in favor of the competition.
So, why should United care? They’re making record profits. Except, again, so are its two largest competitors. In terms of actual profit-to-earnings ratios, margin, and yield, United is at the back of the pack. Obviously, not everyone can be Delta, but in times of record profitability- it is time for investors to focus on whether or not they are getting the truly maximal return. In United’s case, Wall Street is starting to notice. Market analysts are downgrading United’s stock.
Let’s dig a bit deeper.
Recently Delta’s CEO, Richard Anderson, stated that they were very pleased to see a gain in treasured “high-value frequent flyers” defecting to Delta from airports such as Chicago’s O’Hare and San Francisco. When Delta inquired as to why this revenue-critical market segment was flocking to them from traditionally non-Delta strongholds, they cited on-time performance as a major factor. Good for Delta, too. If you look around, Delta managed to keep at least a 43-day streak without a single mainline cancellation since the summer timetable began.
Okay, that’s fine. United can replace these lost high-value flyers with someone, right? Less capacity means there are less seats in the market. Except, the American air travel market is not shrinking. I mean, after all, part of United’s woes come entirely from cutting actual flying but either raising or maintaining ASMs (available seat miles) by adding seats or up-gauging aircraft .
To the average non-AvGeek, a full flight should generate more profit than two 75% full flights on smaller aircraft, leaving in a similar time frame. Not so; yield (revenue/ASM) is king. Now, for future and current reference, United’s yield is about 16 cents per mile. Statistically, higher-value frequent flyers are flying for reasons of necessity and time-sensitivity. They haven’t been planning a vacation to visit the Wigsphere in Knoxville for two years and absolutely have to leave on February 28 (and booked a ticket online the day they got leave approved accordingly).
These flyers are booking premium cabin fares at the highest booking classes (or at least economy at the Y/M/B end of the fare classes). They have to be there for a meeting. They can’t be there for a meeting “that night.” Even worse, they can’t be at that meeting by sitting in Houston as it happened a day before.
If, as a high value customer, you have been burned by United to the point it effected your productivity, you are going to leave for the competition that prides itself on timeliness.
The seats are still going out full. Just, you know, not with the highest yield United was once capturing. I admit, you cannot make a whole flight full of high-value frequent flyers, but get enough per flight and you can change the breakeven seat factor quite quickly. Thing is, you can’t create these whales of a customer out of thin air. If they defect, their replacement might not be willing to pay such a premium for their transport.
This puts United in a pinch. They need to stay on track with Wall Street targets, remain competitive with their two large peers, and also maintain a customer base that is often a key revenue driver.
Something they’ve already been demonstrating through their philosophy on passenger experience is that they need to adjust their customer value proposition and price/product ratio.
Some argue that pre-merger US Airways was caught in a similar bind. Lacking the capital and agility to quickly rise to the standards of the competition, they became obsessed with lower costs to match their lower yields. That said, that was always their vision and they did a great job as a mixed carrier.
United, on the other hand, has been forced to react to losing its mystique.
Global First is not commanding the yield premium compared to other airlines, even when other airlines have refreshed and updated (including revamping the seat count to match demand)? Solution: rip it out! It is easier than having dedicated sub-fleets with first class, with a product and price to match, to serve specific destinations.
After all, United’s “BusinessFirst” product is totally competitive with other airlines’ business class products, but also first! Except, well, United is the only airline in the United States that is neither working towards or in possession of a product that offers all passengers direct aisle access? Is there a new “BusinessFirst” product coming in 2016? Well, maybe? The most recent Jeff Smisek interview was a little ambiguous as to what will be installed on the soon-to-be-firstless 767-322ERs. We do know that it’s “really something!”
It gets stranger. Again, in the same interview Smisek mentioned the first 777-300ER (customer code unknown) will be arriving December of next year. Great, but why didn’t he mention the fact the A350-1000 will be joining the fleet two years later? There’s no evidence to support my tinfoil hat-level theory, except for the fact that United is focused entirely on lowering costs. So, which is cheaper to purchase (not operate)? The 777 at the moment, especially with the pricing Boeing is offering for customers who wish to bridge the gap between the end of 777-300ER production and the start of the 777X -8 and -9. Could Smisek have hinted at a desire to provide Airbus with more choice as to where those delivery slots for A350-1000s will head? I don’t know. I just find it an odd omission.
No matter what, though, United’s operational headaches, legacy product, legacy IT infrastructure, and labor issues are going to cause it further headaches. It’s fine to be making record profits when fuel is low, but United is not using this time of record-low oil and record-high revenues to really make visionary, long-term, changes.
This is going to cost them.