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.

United's fleet has shrunk from a peak of 601 mainline jets in 2000 to 386 this summer. It ranks a distant fourth in passengers boarded, behind Delta, Southwest and American. It remains competitive internationally largely because it participates in Star, a global alliance in which it shares bookings with other carriers.

That's a comedown for an airline that during the first 20 years of the jet age was the biggest and most highly regarded.

United entered the era of airline deregulation in 1979 atop the heap. But it bounced from one strategy to another to try to adapt to the aggressive, price-driven competitive environment. It's had nine different CEOs since then, several corporate restructurings, two painful strikes and several near-miss merger efforts. United even sold itself to its employees in a deal that for five years in the late 1990s made it the largest worker-owned company in the world.

To survive after the 9/11 terrorist attacks, the Chapter 11 reorganization, the expansion of low-cost carriers, and threats of communicable diseases such as SARS and now swine flu, it has shrunk. Last year, it flew 13.3% fewer passenger miles than it did at its peak in 2000.

United, Tilton says, has learned from what it's done wrong.

"There were many different approaches," Tilton says of the many strategy shifts. "But we know one fundamental thing: Without solid, competitive core propositions — operating excellence, customer satisfaction — you don't have a foundation upon which to build."

Broken guitars don't help

Nothing points up the tough job United has in remaking itself like the long-held perception that it delivers inferior service.

Chuck Loring, a 100,000-miles-a-year frequent flier from South Florida, shares that perception. He says he was an elite member of United's Mileage Plus until "several years ago when service in Chicago got so bad."

"Not only did you miss every connection," he says, "but the employees were one cranky group of people after repeated layoffs and salary reductions."

Loring, a partner in a firm that advises not-for-profit organizations, says that when he stopped flying United, he didn't hear a word from the company.

"Not one," he says. "Isn't it interesting, you can go from 100,000 miles a year to zero and no one even notices?"

It's complaints like Loring's that have put United among the bottom of U.S. airlines in customer-satisfaction rankings in the 15 years that researchers at the University of Michigan's Ross School of Business have been surveying customers' opinions. In this year's survey, which reflects the 12 months ended March 31, United was last. It scored an all-time low of 56, eight points below the industry average, and 25 points below perennial airline category champion Southwest.

Graham Atkinson, United's marketing chief, says the public perception is outdated and doesn't reflect the changes the airline has made the last year. Industry consultant Mo Garfinkle, who occasionally works for United, says the airline gets rapped unfairly on customer service. "I'm not necessarily a United fan, but I want to be fair to them," he says. "And I don't think it's fair to say that United is operationally inferior to anybody else."

But perceptions die hard, especially when you have someone like Canadian singer Dave Carroll out there.

Carroll launched a humorous attack video, United Breaks Guitars, on YouTube in July. It told of a spring 2008 incident in which Carroll claims that United baggage handlers did $1,200 in damage to his $3,000 Taylor guitar. The video has been viewed more than 5.3 million times. Carroll last month posted a second video that focused on his frustrating efforts to get United to pay for the damage. It's been viewed over 300,000 times. And now he's working on the third song.

"My goal was not to drive United into the ground, though I've received letters from many people who want to do that," Carroll says. "But if I'm in a position to improve airline customer service, I'm proud to help do it."

To a degree, he's succeeded. United uses the incident in training baggage handlers and customer-service representatives. And it's sent a check for $1,200 to a charity as Carroll requested.

Bonuses for arriving on time

United also is trying to fix its dismal record for being late. Last year, it ranked 17th out of 19 U.S. airlines in on-time arrivals, according to Transportation Department numbers.

"You can't run a great operation one month and a lousy operation next month and expect passengers to believe it's going to be different this time," says Joe Kolshak, United's senior vice president of operations.

Kolshak has added time to United's flight schedules, especially for chronically late flights. With the new schedules, passengers won't arrive any sooner than before. But at least, he says, they now can make travel and business plans with a greater confidence they'll be on time.

He's also paying employees bonuses when the airline is on time. They get $100 each time the airline is tops in the Transportation Department's monthly on-time rankings, as it was in March. In months when the airline places second or meets internal on-time goals, workers get a $65 check. So far this year, the payouts to 42,000 front-line employees are about $18 million.

In July, the last month for which data are available, United came in sixth out of 19 airlines and third behind only Southwest and US Airways among big carriers.

There's another benefit for employees in being on time, Kolshak says. Crewmembers and ground agents can stop apologizing to passengers for being late. "It changes the attitude and the outlook, and you begin afresh."

United also touts what it contends is the best seating options of any U.S. carrier, especially for business and other travelers willing to pay more. "We have arguably the best premium-class products in the nation," Tague says. It's just expanded that with Premier Travel and Premier Travel Plus options. They let passengers pay extra for roomier seats, early boarding, bags checked for free and faster security lines.

Some customers, such as Coy Stout, are noticing.

Stout, a biotech executive from Moss Beach, Calif., who flies up to 125,000 miles a year, says, "The improvements to the three-class international premium cabins put United on a par with any of the international carriers." So when planning a trip next February to Hong Kong and Singapore, Stout says he chose United over highly rated Singapore Airlines.

Skeptics of success remain

Although the immediate financial danger has passed, United's CFO, Kathryn Mikells, continues to sell United's story on Wall Street, where skepticism that the airline can survive long enough to make itself over remains.

United, she argues, has low debt and lease obligations compared with other big airlines, largely because it hasn't taken a new plane since 2002 and hasn't ordered any in 11 years.

Some analysts continue to worry about the carrier's cash situation. It has about $2.8 billion in cash on hand. But it can't touch most of it because of restrictive loan and credit card processing covenants.

But others, such as Bob McAdoo at Avondale Partners, say United never really faced a cash crisis. Between unrestricted cash on hand and the likelihood of being able to raise up to $1 billion more, McAdoo wrote in an August report, "We do not believe that (UAL) will face a liquidity crunch in the foreseeable future."

Mikells says United has demonstrated it can raise capital. It pocketed $600 million this year through various debt transactions. Yet a deal that raised $155 million in July highlights investors' skittishness. It had hoped to pay 12.5% interest on debt secured by spare parts on hand. But to get takers, the yield had to be jumped to 17%.

Yet critics, such as George Hamlin, a veteran airline analyst and consultant based in Virginia, remain. He says United's thin cash reserves in a financially high-risk industry point to a prescription other than a makeover or a merger with another carrier as Tilton seeks.

"I doubt they would take my suggestion kindly," he says, "but United would be a good candidate for breakup into various parts."