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.
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.