DAVID FIELD WASHINGTON
Once mighty United Airlines is a listing ship, with external and internal problems threatening to send it to the deep. What went wrong and what can the company do to right itself?
Although United Airlines is not exactly ignoring the lessons of history it seems sadly fated to repeat them. Once the world's largest carrier, United faces a return of the challenge it has struggled with repeatedly in the past decade. It must overcome near-crippling internal strife while regaining fiscal stability long enough to re-establish itself as an airline of global choice, using its inherent strengths of market reach, extensive route networks, deeply entrenched hubs and a robust alliance. But in its uncertain internal focus, the airline is displaying to the rest of a keenly watching world the fact that its glory days may be past.
Darryl Jenkins, director of the Aviation Institute at George Washington University, says: "Perhaps the lesson of United is that the number one position is one from which you can only fall. They may be in for a long future of stalemate, like the World War I trenches; a long decline."
If its glories are behind it, they are indeed monumental and will remain landmarks. As Global Aviation Associates consultant George Hamlin puts it: "In a decade United built itself from a major domestic carrier into a truly international power, not just with the purchase of the Pan Am routes, but in building its operations and becoming a major brand. And it has demonstrated a landmark accomplishment in Star, the most efficient and global of the alliances so far."
Looking back at more recent history of labour woes and executive upheaval, though, Jenkins says: "I am saddened by what I have seen over the last three years at United." There appears to be plenty to be saddened by. The period has seen increased labour strife, decreased passenger satisfaction, declining market share and increasing deficits. United's third quarter loss was a record $1.16 billion.
Its November traffic fell by 23.5% and its daily cash burn of about $20 million is perhaps twice that of arch-rival American Airlines, says ABN Amro analyst Ray Neidl. Last year, American overtook United in size and scope with its acquisition of Trans World Airlines. American thus trumped United - whose takeover of US Airways was killed by regulators - in the race to be the architect of industry consolidation, while gaining an important regional hub in St Louis.
Faced with such challenges in the past, United's answer was often to bring in new management, either in the form of an outsider like Gerry Greenwald or an insider like Jim Goodwin. Neither worked in the long term.
Under the reign of Greenwald, who entered with the blessings of unions and investors alike in July 1994, the pilot and machinist unions invested $4.9 billion worth of concessions in United. In return, they received a 55% stake in parent UAL and the ousting of little loved chief executive Stephen Wolf.
After Greenwald, the airline thrived long enough for the Employee Stock Ownership Plan (ESOP) to languish while the unions gained enough strength that they could name Greenwald's successor - Jim Goodwin - himself ousted within three years. Each new executive has entered with a deep bow to employees, as Greenwald did when he came in to institute the ESOP.
Buyer's remorse
For his part, Goodwin opened the door to the September 2000 contract that placed United's pilots at the top of the industry's pay tier, inviting other work groups to demand top-paying contracts. This was probably not the chapter in airline history that Goodwin intended to write, as flightdeck pay rises of 23-28% set off a string of demands by unions at other carriers so that they, too have industry leading contracts. At Delta Air Lines, for instance, the United rates served as the baseline for an April 2001 pact that secured for Delta's pilots pay hikes of up to 34%.
The pilot triumph solidified the basic structural problem of the ESOP, says Aaron Gellman of the Transportation Institute of Northwestern University in Chicago. "The mistake was that if the bottom of the workforce earned a fraction - just a fraction - of what the top earns, it wouldn't work." It gave power to the pilots and to a lesser extent the mechanics, while the flight attendants were frozen out. So the employee stake was internally unbalanced. Gellman adds that the ESOP also skewed the basic corporate structure. "If they had kept it to a 33% employee stake instead of 54%, it might have worked," he says. "But management just didn't take the time to study the issue."
Jenkins adds that, once the employees had majority power, they used it like a teenager with a new car, and the resulting struggle over who has the keys and who steers has dominated the airline since. "You have to ask if they are grown ups," he says. "Unless labour and management, grow up and start acting like adults, it will continue to be silly."
If it is time for a change in behavior at United, it had best come soon, but observers are sceptical. The airline's plan to pursue an executive jet operation at a time like this puzzles some. Gellman says, "I don't know why they are going ahead with it. It just gives the pilots another [weapon to use against management]." Others, however, think that United will break new ground with its new Avolar unit, which will offer charter and corporate shuttle services.
But with the larger flying public, United faces a greater challenge. Gellman says the company has become the most hated airline, not just by travellers but by other airlines. This stems, he says, from the pilots' summer 2000 slowdown campaign, which, he believes, was singularly responsible for that summer's record flight delays. While the precedent-setting pilot contract, he adds, won United few friends in the industry.
The way United can regain its centrality to the industry is to reinvent its own history by rewriting its labour contracts, says Jenkins. That, he says, is preferable to a possible bankruptcy filing, which some speculate could be how United erases the employee stake. With a negotiated outcome, Jenkins says, the carrier could avoid the resentment that Chapter 11 would doubtlessly engender while also creating a sense of justice.
All this raises the question: can it be done by John "Jack" Creighton, the chairman and chief executive of UAL since Goodwin's departure at the end of October? Now 68, Creighton is retired from timber cutting and papermaking giant Weyerhaeuser, and is widely seen as a caretaker who will try to arrange a ceasefire with the unions while searching for a permanent executive who will be peacemaker.
Slow-speaking and deliberate, Creighton presents a mixture of sincerity and vagueness. In a recent telephone message to employees, he apologetically explains that his message is late because he must have pressed the wrong button when recording and erased it.
Creighton's positive relations with labour holds some promise for the carrier. The union representing the company's mechanics backed him for the job and the local leader appears willing to discuss pay cuts or other concessions.
Once a pact is sealed with them, the airline will have to work with its pilots and flight attendants. So, for the foreseeable future, United acknowledges, this is a time of inward focus; a time, the company says, in which "we're focusing our energies on getting our ship righted." If it can do so, then perhaps United will be back on course for new glories.
Source: Airline Business
