United Airlines' makeover aims to refresh and renew

Jamie Baker may as well have thrown a stink bomb into the executive offices at United Airlines' world headquarters here earlier this summer for all the ruckus he caused.

Baker, an influential JPMorgan airline analyst, warned in a July 20 report that United and two of its competitors, US Airways and American, no longer could do anything operationally to stave off a cash crisis. Their financial health had deteriorated so badly, Baker said, that the airlines could save themselves only if more lenders or investors could be found to inject money into their high-risk business.

The dire assessment arrived in United's offices just as CEO Glenn Tilton and his executive team had begun to feel good about early results of a makeover effort launched last year to make the once-proud airline successful again.

United is beginning to dispel the nagging perception it has lousy customer service, they say. It's doing a better job getting passengers to destinations on schedule. And its operations are starting to improve, despite a recession-induced drop in travel that's the worst since after the Sept. 11, 2001, terror attacks. Instead of touting that progress, Tilton and his team have spent the last eight weeks trying to convince skeptical analysts, skittish investors and the flying public that United is not as financially bad off as Baker had warned.

They've tamped down the brush fire. United's stock price roughly doubled in August from $3.36 on July 22, two days after Baker's critical report landed. Then, in the last 10 trading days, as all airline stocks have risen, shares of United parent UAL have risen another $3 to close at $9.09 on Wednesday.

Even Baker is changing his tune a little. In two reports this month he has backtracked, saying that United, US Airways and American likely will have enough cash or will be able to raise enough to survive.

Still, the brush fire obscured the story that Tilton and his team want to tell of their airline makeover.

Tilton spent his first 51/2 years after becoming CEO in 2002 focused on two things: getting United through Chapter 11 bankruptcy and looking, unsuccessfully, for another airline to merge with. The focus shifted last year. Tilton reorganized management to do what United's critics say it had neglected for 30 years: run a top-notch airline.

"If you run a poor operation and you're thinking about strategy issues, it's really sort of an academic exercise," he says.

Tilton still believes U.S. airlines must consolidate to have sustained profits. But from now on, he vows, "Whatever we do — whether it be consolidation, whether it be alliances … it's going to be built on the foundation of a solid United Airlines."

Tough climate for a makeover

If United's operational makeover succeeds, says United President John Tague, the airline can separate itself from competitors in performance and public perception.

Attempting a fundamental makeover now is tough. Global recession has sapped people's willingness to travel and ability to pay for it. Airlines are slashing fares and flights to survive. But that reduces revenue. And United's is falling at an alarming rate. Its $4 billion in second-quarter revenue this year was down 25.2% from that time last year.

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