Jeff Smisek’s Ouster is United’s Big Opportunity: Here’s How to Fix the Airline

With Jeff Smisek departing United — the proximate cause being his dinner with Andre Samson, but the departure representing an opportunity to break from the past several years and get a fresh start. Because the airline has been plagued with problems, largely stemming from top leadership.

United and Continental Went Wrong When They Merged

From the time Glenn Tilton became Chairman of United the focus was on selling the airline, rather than running a great airline. He took United through bankruptcy, and went looking for a merger partner.

US Airways and United had been in merger talks on and off for years, a deal ultimately scuttled nearly a decade ago because it wasn’t going to be a US Airways buyout that allowed Doug Parker to take over. In the first set of talks between the two airlines, ultimately called off publicly, Glenn Tilton was openly dismissive of US Airways’ Doug Parker being ready to run the world’s largest airline.

When talks between United and US Airways were renewed, Parker appeared willing to take the CEO role and let United’s Glenn Tilton remain Chairman. United wanted a deal, period, and would probably have merged with US Airways had they been unable to do a Continental deal.

But the potential of a US Airways – United tie-up got Continental to finally move and merge with United. Ultimately Tilton got a merger and a big payout, and Continental got to run what was for a time the biggest carrier.

Fifteen years ago, of course, United and US Airways had actually announced a merger — that United grew cold on with sinking fortunes in the airline industry, and didn’t work to get government approval for. (They would have divested much of the US Airways operation at Washington National into a new ‘DC Air’ led by BET founder Robert Johnson.)

The United-Continental deal was welcomed by many analysts. Continental was probably the best run airline at the time, and United wasn’t strong operationally. Thinking was that Continental management would come in and fix United. But by this time two successive Continental CEOs that had earned for the airline its strong reputation had left. Gordon Bethune stepped down in 2004, and then Larry Kellner in 2009.

I never understood Kellner’s departure at age 50 ‘to start his own business’ in private equity. Some speculated it was his refusal to merge with United that led to the board forcing him out. I don’t have insight into this, but Kellner’s decision not to merge was dubbed his legacy upon departing Continental. And history suggests he was prescient.

Rather than fixing United, Continental leadership led by Jeff Smisek broke both airlines in the process of merging.

United’s IT Systems Remain Broken

The combination of reservation systems and frequent flyer programs in March 2012 was a disaster. Reservations were lost. Frequent flyer miles disappeared. Telephone hold times stretched for hours. And operational reliability plummeted.

Legacy United agents weren’t familiar with the cheaper Continental SHARES system, and didn’t receive sufficient training. Six months later United focused on giving those agents a graphical interface to help.

IT systems have remained a disaster. United suffered computer outages in June and July. United.com went down the day of Smisek’s departure announcement.

Computer debacles happened in February 2014, November 2012, and August 2012.

Management’s Attitude Towards Employees and Customers Is Broken

Two months after the integration debacle, in May 2012, United’s CFO called their most frequent customers “over-entitled”. The customers were the problem.

The airline saw no problem straight up lying to customers when hiding information from them, and then making and immediately breaking promises to lifetime elites.

Indeed, United’s twitter team diagnosed one challenge for the carrier as having too many customers.

This attitude towards customers was underscored when the airline turned customer care over to their lawyer.

When Continental management took over, they did so with an arrogance that their policies were correct and for the most part ought to be applied at United. But that didn’t always make sense, and cost them the goodwill of their best customers. For instance at Continental full fare elites trumped higher status elites for doesn’t upgrades.

Applying that at United meant that government employee silvers on YCA fares trumped 1Ks on mid-tier fares. That’s noise in almost every market, but United operated a hub in Washington DC. Non-government 1K upgrade rates plummeted.

It also meant that United’s Global Services members spending over $30,000 a year or flying over 50,000 full fare miles a year in most cases were losing out on upgrades to Silver members flying full fare for a single trip. That was fixed without a couple of months (Global Services members were allowed to trump fare class for domestic upgrades, though 100,000 mile flyers were not).

This attitude of superior was hardly limited to customers, of course, Smisek blamed employees for the airline’s problems too.

And the merger isn’t even completed yet years later, as legacy Continental and United flight attendants still don’t have a single contract.

United’s on-time performance lags the industry. Mechanics engaged in a job action over the summer which made matters worse.

United Needs a New Vision

United lost half a billion dollars on fuel hedges last year and continued to lose money on its hedges into 2015.

While making money now as a result of falling fuel prices, their operating margins lag the industry. As the airline makes investment in product, they’re not an industry leader. They were late with inflight wifi.

And they’ve seemed to lack vision, ‘managing by doing what Delta does’.

United needs to:

  • Fix its IT.
  • Repair relations with labor.
  • Rebuild trust with customers.
  • Invest in product.
  • Win back corporate customers.

These aren’t easy tasks. I certainly don’t have the technology expertise to tell them how to get their IT systems right, though my intuition is that they made the complete wrong decision to go with Continental’s reservation system rather than United’s three and a half years ago.

They’re investing in product now, but mostly in a catch up fashion. They’ve done a good job adding wifi after being years behind competitors. They’re about to roll out new business seats. They’ve just announced new domestic first class seats (but those are evolutionary and unlikely to win business on their own).

Their move to a revenue-based frequent flyer program was calibrated wrong, simply taking Delta’s numbers when United’s business is different. They did it because Smisek wanted it despite strong internal arguments against the move.

I wouldn’t be able to fix United, but I hope Oscar Munoz can. He didn’t sound especially knowledgeable about the airline business on the investors call the day his appointment was announced, but by all reports he’s a well-regarded executive who was on his way to becoming CEO of CSX before taking the United post and who has served on the United and Continental boards since 2004. He spoke to the right things — spending 90 days traveling the system to talk with employees, committing to product for their customers. Whether he can offer the carrier a vision, and repair relations with customers and employees, remains to be seen. But the change away from Smisek at least gives the airline a shot.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. Don’t expect the FF program to get any better. If Munoz is able to fix all the other problems and make United as reliable operationally and as good in terms of service as Delta, plus United’s better route network, there will be absolutely no reason for UA to offer a better FF program than Delta’s.

  2. I’d like to see it, as a MP Gold. But the new CEO was a board member and the board basically backed Smisek for all these years so what would be their impetus to change?

    UA was more profitable in the last few years, like other airlines. They’re never going to get rid of baggage fees, which is just a cash bonanza for them.

    And they’re probably not going to reverse the changes Smisek made to MP.

  3. You mention that you don’t have the expertise to tell the airline how to fix it’s IT infrastructure – fair statement. The interesting thing to me there, though, is that many of us do, but legacy airlines generally aren’t interested in attracting top technical talent if their salaries are any indicator. It’s simply not a priority for United or anyone else. I get that airlines are in the business of flying, not the IT business, but in an era where paper tickets more or less don’t exist anymore, some strategic investment in systems is necessary.

    I’d love to work for an airline, given that I love flying and travel. I already work in an industry slow to adopt technical change, and we seem downright progressive compared to airlines.

  4. United will have a difficult time fixing it’s problems until they have a CEO willing to tell the shareholders that they are going to invest in fixing the IT, buying new planes and investing in the future including through better labor relations. United just like Delta is too pre-occupied with returning billions of dollars to shareholders. I assure you that if United makes these investments now the shareholders will benefit in the future. It makes no sense to take needed working capital out of the airline and use that money to buy back shares.

  5. Gary, I think Munoz’ appointment will be good for UA only if he had been previously identified in succession planning as the top candidate to fill the CEO post or if he is a placeholder while UA performs a proper search for a new CEO. Even though the rail and airline industries both operate under the Railway Labor Act, experience at CSX doesn’t seem to be the best preparation for leading an airline. Perhaps the UA board sees Munoz as the best candidate to effect corporate culture change that will be necessary to accomplish the fixes you’ve identified.

  6. Don’t forget the flight attendant unions still can’t come to terms. Many FA’s are getting the shaft while it drags on.

  7. I have a lot of hope for Oscar Munoz. Everyone seems to think is really talented. I think the circumstances around Smisek’s dismissal will give Munoz a free hand to make big changes.

    As for your list, let’s be honest.

    United needs to:

    Fix its IT.
    Repair relations with labor.
    Fix its IT.
    Rebuild trust with customers.
    Fix its IT.
    Invest in product.
    Which means Fix its IT.
    Win back corporate customers.
    Who want an airline with better IT.

    I hear Apollo calling. He wants his airline back.

  8. They need to fix operational reliability. If they don’t fix that, fixing the other things will not help much.

  9. Many blogs post that United was poor operationally before the merger.

    It’s wrong though, United made a huge push to be the #1 on time network carrier, and succeeded.

  10. I’m glad to see that United is going to try to get better, it is way to late for me. This is my last year of being 1K. I have been disgusted with the United for a long time, so I’mlying on miles this year. And then fly with someone else. I call United the I’m Sorry Airline. Sorry we are late, Sorry that we have mechanical problems, Sorry the Food is not fresh, Sorry, Sorry, Sorry !!!!

  11. Everyone keep speaking on fixing the IT issue…when actually how can you fix a sabotage. Shares work perfectly fine, if you cared to learn it….and it’s owned by the company. You want to fix the airline, than lets get rid of some of the express carriers that don’t give to shakes about integrity of getting United passengers from point A to B on time without crew issues, maintenance issues or just bad customer service. They operate over 60% of United flights and we use what about 9 of them! Unbelievable! Want change than don’t close any more reservation stations, how about closing that one over in India, no one can understand them anyway! Between reservations, what is suppose to be customer care, and airport personnel, we are not all on the same page!

  12. Customer service is poor because passengers are given incorrect information when they call reservations, they get to the airport and now the frontline agent that has to follow policy is now considered rude and unfriendly with a poor attitude. Train your people in all areas and hold them accountable. Stop letting a tired jacked up Union keep you United from running your company. I have never in all my life seen such disrespect from a work group towards leadership.

  13. Was f/a with UAL for 36 yrs. what I see happening is appalling! Recently flew on ticket because of broken ankle. Plane was an hour late leaving-even tho it overnighted in IAD mechanical issues still needed to be addressed AND when they brought it to the gate it hadn’t been cleaned or serviced!!! Definitely a “I’m Sorry” “I’m Sorry” airline! Hope Munoz can HELP!!!

  14. Fix your labor problems and you would surprised at how fast things can turn around………..UAL can start by listening to the employees and the retirees. The easiest one to start with is “the retires” and it is a no cost fix………..We (UAL retirees) got robbed of our worked for benefits……..re-establish our benefits and trust, the active employees will see that there is hope for getting on the right track! Come on down from your “Ivory Tower”, and LISTEN to the “Grunts”. ITs called “TRUST”! PS, I am a 43 year active (UAL) and retired 16 years.

  15. All an airline customer has ever wanted , EVER was to be on time. An operating system that was laser sharp , united previous system, and maintained airplanes, valuing their employees and lastly and most important valuing the customer. That’s how to start the fix. They chose a system that at best is an etch a sketch to run a massive airline is obtuse at best. Eliminating a crew scheduling program that worked well was moronic. Not to mention an inventory management system that was top tier also eliminated, was the biggest blunder of all. Mr.munoz will be hard pressed to gain support of the already seriously devalued labor, and will most definitely need to leave the ego at home. Good luck on that one.

  16. As an employee of continental/United for 23 years the merger was horrible for employees and customers alike. .I don’t see anyone mentioning the out sourcing issue. United took a great airline airlines destroyed it. The moral of the employees spread like a bad virus. Of course that transpires to the customers. The union was horrible , the contract was horrible. If you don’t take care of your front line workers what inspires us as employees to give great customer service. As a continental trained empoyee it was disheartening to witness this change happen. But I still went to work everyday with a smile on my face and tried. I was not letting the virus get to me. On May 17 I was basically forced to retire because of the great cost saving idea of out sourcing front line employees. Needless to say we were not making That much money. So someone with 23 plus years of experience was replaced. There were many people displaced or forced to retire. Bad Customer Service ?? I wonder why.

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