United Shares 'Plan Of Transformation'
In today's hotline message to employees, United Airlines laid out long-awaited plans for the company's transformation, including a lower-cost mainline product, a new low-cost subsidiary, expanded United Express operations and deeper cooperation with alliance partners.
Central to the plan, according to the hotline message, is United's network strength. "United is the number-one carrier in five of the top 25 markets in the United States, serving 36 million people and tapping into $16.3 billion in revenue for the airline," United said. The carrier noted that American Airlines places second, also is number one in five of the top 25 markets, but accesses only 21 million people in those markets who spend $11 billion on air transportation.
"We simply generate more money with our network," said Doug Hacker, United executive vice president of strategy. "What we don't have is a cost advantage and flexibility that would allow us to respond to substantial changes in the market."
The company said its mainline service must "meet the needs of the core business traveler, while maintaining the lowest cost among network carriers." To achieve a goal of transforming mainline United while saving $500 million, the carrier is in discussions with labor unions and working with several other parties. Its proposed actions include restructuring the fleet, sharply reducing capital spending and "revising other corporate contracts." No other details were provided.
"We want to be the most cost-competitive network carrier," Hacker said. "That means competing with and surpassing Delta." Delta Air Lines reported fourth-quarter units costs of 9.97 cents, below AMR's 10.73 cents and United's 11.73 cents.
As expected, United, which said it faces low-cost competition in 70 percent of its markets, also plans to create its own low-cost operation. The company said the new airline would "learn from the industry's past mistakes." United, shortly after Sept. 11, 2001, shut down West Coast United Shuttle operations. United said it is discussing with labor unions the specifics of the low-cost unit, noting that it has "proposed creating a separate entity with its own management and employee workforce" that would remain integrated with United's network, brand and frequent flyer program.
On the alliance front, United acknowledged the diminishing Star Alliance lead over competing partnerships and announced plans to create a transatlantic joint venture with Star co-founder Lufthansa. It also ultimately expects to rake in $200 million in incremental annual revenue from the new domestic alliance with US Airways.
In an intriguing statement, United added that expanding domestic reach requires it "to implement the same kind of joint venture and revenue-share arrangements that have allowed it to generate more revenue from international relationships." Without providing details, Hacker said the carrier will "translate international alliance success to the domestic market."
The United-US Airways partnership, which includes code sharing, currently does not call for revenue sharing.
Another prong of United's plan calls for United Express expansion. "United is falling behind the industry in deployment of regional jets," according to the hotline message. "Fifty-four percent of Delta's fleet are RJs. Continental is a close second with 50 percent. United's RJ fleet stands at 23 percent."
Hacker noted the 70-seat regional jet "falls nicely" between 50-seat RJs and 100-seat jets. "Extending the range of the Express product allows us to serve a number of markets out of Denver and Chicago that we currently can't reach economically," he said.
United pointed out that the plan for transformation only charts the strategic direction of the company. A separate plan of reorganization, "necessary for emergence from Chapter 11," will be finalized at a later date.