United Airlines has released its 2014 Quarter One investor guidance and the figures are ugly. United blames the weather, the late Easter holiday, and the reduction of its regional jet fleet, but the signs point to a more ominous reason—continued poor management of world’s largest airline.
My aim here is not to personally attack CEO Jeff Smisek or his team. Rather, it is to demonstrate that United’s continued excuses for its poor performance both outright and relation to the competition expose an endemic problem that gets to the heart of the management failure of the “new” United Airlines, now two years old.
United’s passenger revenue per available seat mile (“PRASM”) is down again: revenue that had been projected to be up 2% will instead fall between 0.5% and 2%. Here is United’s official spin:
Due to the severe weather, United’s combined January and February 2014 month-to-date regional completion factor is 87.1%, nearly 9 points lower than its mainline completion factor, an extraordinary low level. Due to the shorter stage length of regional flights, regional [PRASM] is typically almost twice as high as mainline domestic PRASM. Consequently, the reduction in regional flying has had a disproportionate effect on United’s consolidated PRASM. The weather-related cancellations to date have reduced first quarter 2014 consolidated PRASM by approximately 1.5 percentage points.
Additionally, March yields have weakened, in part due to a larger than expected shift in Easter and spring break demand from March to April.
Poor weather did hit United particularly bad. With perpetual storms affecting hubs in Chicago, Cleveland, Washington, and Newark, United has cancelled over 22,500 flights year-to-date, with 20,000 of those cancellations regional flights. Regional jets to smaller destinations tend to fetch a higher ticket price, thus it is not surprising that PRASM is down again. But that is not the whole story.
Delta Does Well
Delta cancelled 12,000 of its flights and faced horrible weather as well at its Atlanta and New York Kennedy hubs. But, Delta proudly reported a 4% year over year PRASM gain today and attributed a 0.5% increase to the weather…which is the industry trend.
Normally poor weather helps PRASM numbers because cancelled flights usually mean that other flights go out with higher loads. A simple way of looking at it is that money is saved by not operating flights if those passengers can be accommodated on other flights that the airline is already operating.
While United is forging ahead with $2BN in cuts, Delta’s revenue continues to grow as it adds services and amenities to its in-flight product.
United’s Deeper Problem
The problem for United is that the excuses are wearing thin: it continues to make excuses, time after time, quarter after quarter and things are just not getting better. Last month United revised earning estimates down using the same reasons—weather and a late spring—and now it is using the same excuse for the even worse numbers now emerging.
Let’s not forget United’s enviable position of power as world’s largest airline in late 2012/early 2013. United had the best route network, most fuel-efficient fleet, and the best hard product of any U.S. legacy (lie-flat seats on 100% of international longhaul flights). With service to six continents and a powerful presence in 49 U.S. states, no matter where you were going, chances are United could get you there. If not, one of its Star Alliance partners certainly could. Further, while Delta and American were operating many longhauls with dated angled lie-flat business class seats, United could boast horizontal lie-flats on all of its longhaul fleet.
Rather than capitalizing on that advantage and rapidly installing internet on its aircraft to match the competition (or high(er) speed internet to beat the competition), the leadership at United patted itself on the back and uncorked the champagne. Instead of using its brief opportunity in a leading position to further distance itself from the competition, it let the competition catch up.
Now Delta has caught up in terms of hard product and American is close behind. Delta and American have wi-fi throughout much of its fleet while United still lags far behind. Delta has positively enhanced its onboard service again and again over the last year (see e.g. complimentary meals on transcon flights in Economy Comfort, enhanced Sky Club amenities, free alcohol in economy class) and even won the prestigious 2014 Airline of the Year by Air Transport World magazine. Both American and Delta will soon have all lie-flat seats on its premium transcon routings between JFK and LAX/SFO, further snatching from United a competitive advantage that it has failed to capitalize on by offering such a mediocre soft product.
United still has the best route network, but Delta has a powerful one of its own and if the merged American expands its service and partnerships in Asia, United will lose one of its final strategic advantages. With disgruntled employees and labor disharmony, an archaic passenger service system, fuel on the rise, a regional jet pilot shortage, and a paradoxical goal of cutting its way to growth, 2014 is already shaping up to be a bad year from United, even if it ekes out a profit.
Thus, the problem is not just bad weather or Easter being in April instead of March, but a failure of vision and key strategic blunders that have now made United much less competitive relative to Delta and American.
The Solution: A Differentiated Vision of Loyalty
In a future post, I will lay out my case for United’s best hope of remaining profitable, and that is through a differentiation of loyalty. My plan will go far beyond just tinkering with United’s MileagePlus loyalty program, but appealing to a market segment that Delta has now forsaken but United can capture without sacrificing the integrity of its premium product.