There are a number of challenges United and UAL must face in order to save itself from financial doom. Some of these are very simple, others more complex. But before the fix, let me discuss the issues:
- UAL has based its business model focusing on business traffic as the basis for its revenue base. Leisure traffic is gravy. The problem is, and having heard this directly from Rono Dutta, UAL President, 46% of their revenue comes from 6% of their passengers. While this may be a good thing, the problem is that if those 6% go away, what happens then? Financial disaster.
- Because the cost structure (and bureaucracy) of UAL is such that they cannot survive without the business traveler in the long term, and with no traffic in the short term, when they run out of cash, they certainly go into bankruptcy.
In the very short term, the matter is not reducing capacity, but making certain that the capacity cuts match the market and that as the market returns, they are in a position to grow their capacity. This is easier said than done in the airline business. To date, United has been reducing capacity by pulling down its more fuel inefficient aircraft, which is a good move, but much more needs to be done. The thing is to get costs down without losing their market presence.
So, with that, here we go.
- Ground all B747-400 aircraft. Replace these aircraft with B777-200 which are smaller and much more fuel efficient. These aircraft have nearly the range of the -400 with 100 less seats.
- Replace all B777 routes with B767-300 aircraft. Same idea. Most routes that are flown with the 777 can be flown with the 767.
- Most long haul domestic routes should be flown with A319/A320. These aircraft have the best seat mile costs in the airline. The 757 is next in those markets where the traffic can support an 80% load factor.
- Eliminate routes that had poor margins before the Sep 11 crisis (this may require going back to year 2000 to review) and those routes that will get the airline to the fleet positioning discussed above.
- There needs to be union and non-union participation in cost cutting, which means both reductions in head count and reduction in salaries across the board. This is going to be a difficult proposition for the company. There needs to be at least a 40% reduction in labor costs. This can be paid back in profit sharing once the company starts making a profit again. In other words, provide an incentive for the employees to take such a hit.
- If necessary, perform lease back transactions on any aircraft which can produce cash to keep the company in a positive cash position for the next 6-9 months.
- In the long term, the cost structure of UA needs to be changed to provide for a different passenger mix, so that the leisure/VFR (visit friends and relatives) provide a greater contribution in terms of margin (even those yield per mile tend to be lower). This will improve the margin on those business passengers when they come back.
In closing, all the employees of United Airlines need to pull together and pull in the same direction. The unions need to stop criticizing management, and management needs to stop its strong arm tactics with the unions by writing letters designed to scare the employees and its stockholders. Oh and by the way, all the top guys at United, except Rono Dutta, need to be gone. They run the airline the old fashioned way and 30-year-old thinking isn't going to work in this environment.
Hopefully, these people will listen.
The above was originally posted on our UAL discussion board on Oct. 25, 2001.
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