John Tague
Citing "significant losses," United Airlines last week said it sold to Delta Air Lines its route authority for New York JFK-London Gatwick service (it has not said what it may or may not do with its New York JFK-London Heathrow slot) and plans to switch nonstop New York JFK-Tokyo service to Washington Dulles. The airline also last week said it would add 40 new weekly flights to Asian destinations within the next nine months and this week reiterated plans to introduce a new international premium product in 2007. United executives this week briefed analysts and journalists on second-quarter performance (a $119 million net profit) and other recent developments. They clarified the Delta transaction by explaining how current transatlantic rules complicated the possibility of including Heathrow rights, and addressed questions on changes to the global network.
Why is United cutting international services from New York?
The lucrative market to Europe still extracts high prices from business travelers and therefore presents heavy competition, from both entrenched network carriers offering deep schedules and newer service providers specifically targeting the business travel segment. Because New York is not one of its five domestic hubs, United chose to stop battling from a position of relative weakness, opting instead to further develop San Francisco and Washington as international gateways. By contrast, Continental Airlines operates a huge hub at Newark Liberty, Delta Air Lines is rapidly expanding international service from JFK and American maintains a sizable presence in the New York market. On the other side of the Atlantic, Air France, British Airways and Lufthansa funnel passengers to and from New York through strong hubs in Paris, London and Frankfurt, respectively, and Virgin Atlantic operates a sizable flight schedule from London Heathrow. "He who has the structure wins, and he who doesn't doesn't," said United chief revenue officer John Tague. "We were not winning."
What is the impact?
Tague acknowledged that United's international network decision "puts a negative cast" on the carrier's ability to serve accounts with business travel volumes to, from and through New York. Recently clear of bankruptcy but by no means immune to ongoing cost pressures plaguing the industry, United must pick its spots, he explained, rather than be "held prisoner to the fear about what happens to the value proposition for New York clients." As a result, corporate accounts previously relying on United to provide service between New York and London or Tokyo--for direct flights to those cities or as part of connecting itineraries to destinations in North America, Europe and Asia--will have to consider alternatives or tell travelers to book more connecting flights through United's other U.S. gateways. United instead will cultivate its "core client proposition" in those stronger domestic hubs, Tague said. "We came to the conclusion that the benefits associated with this change far outweigh any marketplace reactions to the reductions."
How will United fill the gap for its global corporate customers?
In two words, Star Alliance. In addition to leaning on Lufthansa for transatlantic support, United still will share codes on partner ANA's nonstop JFK-Tokyo Narita service. And while United itself in October will start nonstop flights between Washington Dulles and Narita (its "first-ever" service from Dulles to Asia), it still will share codes on ANA's Dulles-Narita service. "It is a practice we have in all our deep alliance relationships," Tague said. "While we compete with each other, we also enable each other's success. We have found markets that are deep markets for us and our alliance partners to be among the most profitable on the system." Moving forward, he said United expects "to deepen cooperation" with its Japanese ally, following the Lufthansa-United precedent. Of course, United also would happily connect more business travelers through Chicago and Dulles to Europe, and through Chicago and San Francisco to Asia. To that end, it will extend to year-round San Francisco-Seoul service, and in April will reinstate San Francisco-Taipei flights and add three additional weekly flights between San Francisco and Hong Kong.
When will United's new international premium product be ready?
Next year. During its lengthy bankruptcy, United introduced domestic product enhancements including premium transcontinental service and premium regional services, while continuing to promote and expand an additional, slightly higher-end economy option. But on the international scene, it fell behind. United now is working to develop its response to improved premium services offered or announced by American, British Airways, Delta, LAN, Korean Air, Northwest Airlines, Virgin Atlantic and several others, as well as single-class high- and higher-touch operations provided by MaxJet and Eos. Tague said United's new premium offering "will be an industry-leading and worldwide competitive first class and business class product ... allowing United to increase its total aircraft seating capacity." United has not released any details or specific deployment schedules.
How will United continue to improve revenue performance?
Like most U.S. carriers, United this year has experienced strong revenue trends that offset high crude oil and jet fuel prices and buoyed the company as it completed a bankruptcy restructuring this winter. But analysts cautioned--and executives agreed--that the airline still has room for improvement. "Although the [$119 million net profit] indicates that the company appears to be turning the corner to returning to consistent profitability, it still has more work to do to catch up to and surpass its peers," according to a report by Calyon Securities analyst Ray Neidl. On the revenue side, United said that work includes optimizing the network by strengthening its presence in San Francisco and Washington, expanding service on transpacific routes, aligning with ANA and leveraging business-oriented services to compete for high-yield business travelers. United also seeks to improve relationships with big corporate customers, including travel managers who have complained since earlier this decade about a string of mishaps and unpopular strategies, including a battle with pilots that led to massive operational disruptions in summer 2000; a move to share-based contracts and specific customer data requirements in 2002 that took many by surprise; a noticeable amount of turnover among top executives and sales personnel; and the high-anxiety bankruptcy reorganization that finally ended this year. "We are beginning to get traction in the corporate marketplace," Tague said. "We had a damaging experience with the corporate marketplace over the last several years and we are beginning to see the upswing from what we characterize as a long road back."