The new climate at employee-owned United, instilled by chairman Gerald Greenwald, has not filtered through to the airline's grass roots nor brought any obvious great advantages over US rivals. But the airline's strategy looks sound and profitability is at an all-time high. By Karen Walker. Gerald Greenwald, United Airline's chairman and chief executive officer, is one of a new breed of senior airline managers. His management experience is gleaned from outside the industry, and he carefully cultivates his man-of-the-people image. When Delta Air Lines' board of directors appointed Leo F.Mullin as its new chief executive officer, Greenwald was one of those cited as an example of what an outsider can bring to an airline. Fresh ideas, an open work environment and easy lines of communication are the hallmarks of these new executives.

Communications gap

Not that it always works. When United staged its first-ever media day earlier this year, the event was held on a Friday, now a semi-casual day at the new-look United. The gap in communication, however, was obvious as soon as people filed into the conference room - the PRs in open neck shirts and slacks; the management team and journalists in formal business suits.'Should I take off my tie?' inquired a slightly intrepid Greenwald. Other gaps are apparent between what is often spoken about and what happens in reality.

United's strong financial position gives little cause for concern, but the future of its employee stock ownership plan, or Esop, is less clear cut. The airline's operating profit hit $1.1 billion last year - making it one of just four airlines to break through the billion dollar barrier - and stockholder returns on its shares have increased by 260 per cent since mid-1994. Prospects for 1997 look even better. This year's second quarter results set another company record, with operating earnings up by 12.7 per cent to $638 million and net profits up 11.6 per cent to $376 million. However, United's Esop expires in 2000 and a picture of what will happen then has not been clearly drawn.'We will have choices,' says Greenwald. 'It will probably mean that all of us will have to buy new shares, old and new.'

United's cornerstone for continued financial improvement is the high-yield customer, whom the airline is now courting with all the single-mindedness of a matchmaking mother. And part of that courtship - in textbook American open management style - involves confessing one's failings.

Greenwald has gone highly public on the woes that now lie in wait for every travelling American. Long queues at the terminal, packed aircraft that seem to offer a disproportionately high number of middle seats, delays and lousy catering, if food is offered at all. These have become standard fare on US air service in the 1990s and Greenwald hit a nerve when he came out and admitted it was all true. He also attacked the hypocrisy of the airlines, which continue to advertise flying as a glamorous experience, and called for a reality check. 'We have been full of smoke and clouds and nobody believes us any more,' says Greenwald.

As a marketing ploy, the move worked well. First, because it is true and second, because United has behaved no worse and no better than its US competitors (with the notable exception of Southwest Airlines) in disregarding customer service while it struggled to balance the books. So the customer is not meant to think: 'That's right - flying with United is awful', but instead thinks: 'Flying with any US airline is awful . . . if United admits that and is doing something about that, I'll choose them.' Or so the marketeers at United are hoping, anyway.

Saatchiesque tactics

As part of the 'get honest' campaign, United has dropped its banner phrase 'Friendly Skies' and replaced it with the ethereal slogan 'Rising'. Cue a new series of advertisements that pursue the 'we understand' philosophy. Will such Saatchiesque tactics actually work on the highly-sceptical passenger?

Greenwald's strategies have been mostly admired by analysts since he took the helm in 1994 and brought with him the dual lessons of economics and customer service he learned in the automobile industry. So far they seem prepared to hold the faith on this initiative. 'Changing the image or the colour scheme or the slogan must be done in conjunction with visible changes in the quality of the product. One without the other will lead to failure,' says Julius Maldutis, an analyst at Solomon Brothers in New York. 'But United is making a number of changes and they are consistent with the changes in image. I don't necessarily agree with some of the themes, but in fairness the company is starting to deliver on its promises.'

Susan Donofrio at NatWest Securities also sees a real change going on behind the advertising hype. 'United is paying close attention to what its high-yield passengers want, clearly focusing on them,' says Donofrio. 'This approach is already paying off, since United's share of the high-yield market continues to climb and there is no end in sight in the near term.'

Greenwald himself points out that efforts to improve customer satisfaction go beyond the advertising campaigns. More comfortable seats, improved food, more inflight entertainment options and new technologies that will speed up the check-in process are all being introduced this year. At the top of United's most wanted list - and to whom most of the changes are addressed - is a customer that the airline labels the 'road warrior'. The warrior makes up just 6 per cent of the customer base, but provides 37 per cent of revenues. A 1 per cent increase in the road warrior market share would bring in additional annual revenues of $200 million, says David Coltman who, as senior vice president of marketing, heads United's road warrior campaign. 'People use airlines for three reasons - network structure, the city they live in, or preference. Previously, airlines relied too much on the first reason. My job is to improve the third - preference - because if we have all three, then we can be a significant worldbeater. We are not actually in the dummy class already,' he adds, since United's surveys place it slightly ahead of American Airlines and Delta Air Lines in terms of preference.

Unique personnality

Coltman says that to be the airline of preference, United has to perform 'very well' and have a 'clear and defined personality'. This is not about service, he says, but about strategy. 'We are in the process of designing a personality for this big set-up. Virgin Atlantic has a personality - if Richard Branson likes it, they have it. It's the same at Southwest. You have to design and create your own unique personality.'

Greenwald's own easy way with people should make him a natural here, but the personality-building process still seems more manufactured than spontaneous. John Edwardson, the airline's president and chief operating officer, admits this culture change is viewed by the sceptics as merely an attempt to appear 'warm and fuzzy', but maintains that a company's culture will drive its success or its failure.

Some employees charge, however, that while Greenwald and Edwardson may themselves genuinely believe in change, the philosophy is not filtering though a strata of management that was in place before their appointments.'We have not experienced any culture change - it's still the same old school,' says one flight attendant. Another comments 'Greenwald holds the view that wholesale management change sends a chill through the company, but one or two meaningful 'early retirements' would signal he means it and he would get a return.'

So is United's new corporate culture and open climate just smoke and mirrors?

United became the largest employee-owned airline in July 1994 when it handed 55 per cent of its shares to the workers in return for wage and benefit concessions. Some 60,000 of the company's 85,000 employees now belong to the Esop and Greenwald still reiterates at regular intervals his hope that the scheme will become universal 'in the not too distant future'- a notion which seems unrealistic given that United's Association of Flight Attendants members have never expressed interest in the Esop. Furthermore, the proposed new agreement with the AFA that has recently gone to vote and is expected to be ratified in October includes no mention of the Esop. Given that the accord will be valid until 2006, discussions on Esop membership, while not impossible, seem unlikely in the near-term.

Kevin Lum, master executive council president at the United chapter of the AFA, says there is no interest in the Esop. It was deemed too expensive when it was first offered and 'nothing has changed', he says. Not getting 100 per cent involvement from the outset was regarded by observers as a mistake because it created a rift among employees. Lum himself acknowledges that the AFA holds on to this bargaining chip. 'I liken it to Olympic sponsorship,' he says. 'Companies pay a hefty fee to be an Olympic sponsor because of its value. To have a 100 per cent Esop would be valuable for United, so the airline would have to pay for that. We would want to have some tangible returns.'

United's Coltman does not see any contradiction in the airline's launching of a campaign that promises better service while simultaneously wrangling with its flight attendants over pay and conditions. 'What the flight attendants will tell you is "give us the tools to do the job - a clean aircraft with comfortable seats that leaves on time, and a good meal." That puts the passenger in a better frame of mind and makes their job easier. The feedback we are getting is that this is great because we are giving them tools to do their job and reach out to people.'

Lum counters that the change is not that straightforward. 'They have not discussed this new campaign with us at all,' he says. 'Yes, we need the new tools to do the job. But it is not simply about saying we will put a bigger or tastier steak on the plate - we need enough steaks to feed all the passengers; we need ovens that work.' Most vitally of all, Lum says United needs more flight attendants to compensate for the shortfall of around 2,000 cabin crew that occurred during the transition to the Esop and has never been made up. 'That cannot help but have a negative impact on service,' says Lum. 'The flight attendants have the highest sick rate of all the employees' groups and the company doesn't seem to recognise that it's because they are worn ragged. It has become a vicious cycle.'

And any illusions that management might have held about Esop workers behaving differently from their non-shareholder colleagues at other airlines were jolted earlier this year when United's pilots and mechanics turned down tentative agreements on mid-term wage increases. As Ken Thiede, president of the local district of the International Association of Machinists, put it: 'Employee ownership means workers must be able to express their views freely and to have those views respected, and to share in the financial success of their company.'

Restoration of wage rates

The argument at United's unions was in essence the same as elsewhere in the US airline industry: when times are good, they expect to see it reflected in their pay. The deal that was eventually struck included a 5 per cent wage increase this year, another 5 per cent next year, with the restoration in the year 2000 of wage rates to levels that existed prior to the Esop.

Another area in which the Esop appears to have been of little help is the now-familiar problem of how regional jets are operated. Greenwald says only that negotiations with the pilots continue. In the meantime, however, Atlantic Coast Airlines, an affiliate of United which operates as United Express in the eastern US, is drawing up plans to start a stand-alone operation with four Canadair Regional Jets should United be unable to reach a timely agreement with its pilots. While the regional jet issue at United has not been entangled with pay negotiations, it is still proving to be an awkward and lengthy problem.

Where Greenwald has scored an advantage over his US competitors is with Star Alliance, which is up and running even as American's Robert Crandall beats his chest on Capitol Hill and pleads for permission to forge an alliance with British Airways.Timing was important - Star Alliance was born before lawmakers had any serious concerns over the global alliance trend. And yet Star, even in a global alliance context, is huge. By welding together United, Lufthansa, Scandinavian Airlines System, Air Canada, Thai Airways and Varig, Star will serve more than 180 million passengers annually and bring in revenues of more than $45 billion. The alliance is the driver of United's international strategy of increasing its network through codesharing.

Global colossus

Superlatives trip off the tongue of Solomon Brothers' Maldutis: 'It is an outrageous winner - a global colossus. It is way ahead of anyone else,' he says. 'If the American/BA alliance is going to be modified, then it is going to be difficult to catch up.' Maldutis points out that, while United's previous CEO, Stephen Wolf, lay the foundations of an alliance by forging the first agreement with Lufthansa, Greenwald must take credit for creating Star. In particular, says Maldutis, the deal with Air Canada was a smart move that is paying off. That agreement now has tentative antitrust immunity approval from the US Department of Transportation.

Large as it is, Star is not yet complete. While Chris Bowers, United's vice president international, is coy on increasing speculation that Cathay Pacific and/or Singapore Airlines may be next to join, he acknowledges that United is looking for more partners in three key regions - Africa, the North Pacific and Asia/China. Another pointer: 'We are not interested in helping to bail out weak carriers,' says Bowers. 'We want industry leaders like ourselves. We are looking for organisations that want to share a close relationship with us.'

With Varig, which joins Star in October, United is looking to bolster in Latin America what it admits is currently a fairly-poor second position to American Airlines. 'We are number two, but there is a good size gap between number one and number two,' says Greenwald.He adds that United has learned to be selective in this particular marketplace and that the relationship with Varig should allow each to benefit from the other's strengths, such as Varig's rights to fly between countries in South America.

Back in the US, Star has not distracted United from its domestic network. Here, United is focusing especially on what it describes as its 'superstar' cities, such as home-hub Chicago, Denver, Los Angeles and San Francisco. 'We cannot drift in too many directions so the focus has to be on the star cities,' says Rono Dutta, senior vice president, planning. In particular, Los Angeles is seen as a major source of growth. United's market share at LA has increased from 26 per cent to 30 per cent since June 1994, but Greenwald is even more ambitious. He believes that continued marketing efforts can make LA as successful as San Francisco, where United has a 60 per cent market share.

Denver, where United has a 66 per cent share of the market, has also become vital to United's domestic system. 'All of us wrung our hands for several years over that big and enormous case of Denver Airport,' admits Greenwald. It is still an expensive place to be, accounting for 50 per cent of United's airport costs and the airline says it only makes money from Denver because it fits into the total network, making up 18 per cent of the system. 'Today, it is geographically wonderfully positioned,' says Greenwald. 'It is our best connecting airport because we are in one concourse and have the ability to extend from 300 to 400 flights a day.'

United's market share at Chicago has remained at about 50 per cent over the past two years, but Dutta says that it will be difficult to improve on that share because Chicago O'Hare is a slot-controlled airport. Protecting these hubs, and the feeds to them - hence the importance of United Express - is fundamental to United's long-term success, along with attracting the high-yield passenger, says Dutta.

Altitude goals

The Shuttle by United, a short-haul, low-fare operation launched in 1994 to compete with other low-fare airlines in the west coast area, has now expanded as far east as Denver. The Shuttle has 450 flights daily between 20 cities, is profitable and accounts for 5 per cent of United's total capacity. 'It's doing just fine, but we need to get our costs down further,' says Dutta.

Summarising United's future, Greenwald describes it as a ladder with four altitude goals.The first rung will be mastered when United is assigned a full investment-grade credit rating. The second goal is a new and simplified fleet. In May, United was operating 566 aircraft of eight different types, but it does not anticipate a long-term, exclusive contract with a manufacturer. It currently has 87 aircraft - Airbus A319/320s and Boeing 747-400s, 777s and 757s - on order. Third is 'strategic and profitable' growth and the final rung will see United returning cash to shareholders through dividends and/or stock buy-backs. This, says Greenwald, is the path of the 'not-too-distant' future.

Source: Airline Business