Strategic Planning Lessons: Why United Airlines Was Forced to Merge with Continental
Dec. 7, 2011
United Airlines (UAL) was forced to merge with Continental Airlines because of anemic strategic planning.
It’s a $3 billion merger with about 1,200 jets and more than 86,000 workers.
Sadly, after eight decades, UAL’s logo is history. The Continental logo remains.
The merger has meant a mega review of 2,000 policies and procedures.
UAL’s loading procedure prevailed. Window passengers seated first, and aisle passengers seated last. To UAL’s credit, this makes for the fastest-possible boarding time.
Its policy for loading pets will remain – they will be loaded onto the jets tail-first. Amen.
But starting with the new branding slogan, “Let’s Fly Together,” one has to wonder if the new airline will get it right. The slogan does not convey a fun experience with value and safety.
When the student is ready, the teacher appears. In a dubious way, management at UAL is our teacher in strategic planning.
History of good planning?
In 2002, I wrote an uncomplimentary commentary about UAL’s management. UAL’s bankruptcy filing was a major concern to businesses, investors and workers. It was the largest airline bankruptcy in the nation’s history. UAL comprised about 10 percent of Boeing Capital’s $11.5 billion loan portfolio as a result of jet deliveries to UAL.
Boeing’s move to Chicago, which is also UAL’s home, made it easier for the manufacturer to monitor bankruptcy proceedings and to persuade the airline to make good on its financial commitments. My sense was that other reasons included the attitude of labor, the Washington State Legislature’s approach to business and the need to be close to money markets and be more centrally located for stakeholders.
In May 2005, UAL’s plan to terminate employee pensions – the largest corporate pension default in U.S. history – was approved by the bankruptcy judge. UAL managed to dump its pension obligations on the Pension Benefit Guaranty Corporation (PBGC).
In Oct. 2005, the airline got a $3 billion loan from JPMorgan Chase & Co. and Citigroup Inc., and emerged from bankruptcy in Feb. 2006.
Poor ESOP model
In the wake of UAL’s financial collapse, it might have seemed logical to rebuke employee-owned companies, or employee stock ownership plans. UAL’s failure was not a reflection of ESOPs but it provided lessons in developing a productive business model and operating a complex enterprise. After all, there are more than 11,000 successful employee-owned companies throughout the nation.
The ESOP concept evolved when it was theorized that company employees are more productive when they feel a sense of ownership. But UAL’s ESOP was established for the wrong reasons in 1994.
You might recall the acrimony at UAL when the CEO, Stephen Wolf, threatened to break up the airline and outsource maintenance projects. Instead, Mr. Wolf was given $30 million to walk away as the unions embarked on their plan to save thousands of jobs.
UAL essentially became an employee-owned company, 55 percent of the shares, in 1994. Employees gave up some $700 million in wages and conceded some work rules. In exchange, the workers bought out the boss and stockholders.
The TV ads were glitzy and impressive as UAL’s stock ultimately soared above $100 a share in 1997. Then it happened: The concept was failing and UAL’s TV ads touting the airline as an employee-owned company disappeared from the airwaves. The sky-high stock price began to descend.
Published reports in 2002 indicated union members needed to conduct a reality check about their misdirected anger – they blamed the Air Transportation Stabilization Board for refusing to make a $1.8 billion loan to UAL.
There are good reasons why UAL’s ESOP failed to blossom and the bud fell off the rose. It wasn’t because of 9/11, or because the airline was refused the government bailout. Simply put, harmony and healthy participatory management are needed for ESOP success. UAL’s ESOP proved to be an anomaly – management and employees were not united.
Strategic-planning lessons
Of the 14 major airlines before 1978, only six remained in 2002. Like the 120 carriers that have failed in recent decades, UAL failed because of an unproductive business model:
Infrastructure. Bigger isn’t always better. In 2002, UAL was the second-largest carrier behind American Airlines. It dropped to fourth in passengers flown. UAL had unsuccessfully operated hubs in Washington D.C., Chicago, Denver, San Francisco, and Los Angeles. A modified hub system with more direct flights would have been less costly to operate.
Uniformity. It only seems logical and cost-effective to operate a single aircraft brand for the majority of operations instead of a hodgepodge of planes. There are usually rewards for being loyal to vendors, including cost savings in purchases of jets and parts, as well as maintenance and operation simplification with one aircraft line instead of multiple aircraft makes.
Finally in 2009, UAL began negotiating with Airbus and Boeing for the purchase of 150 fuel-efficient planes to replace part of its aging fleet. Given its balance sheet, it was anticipated that UAL would depend heavily on the manufacturers for financing.
Did UAL finally learn that it will have more leverage if it limits its purchases to one manufacturer? No. UAL bought from both Boeing and Airbus.
Market conditions. Yes, airlines have had a tough time, especially because of fuel prices and passenger demand. But profitable airlines have consistently utilized economic principles, such as a no-frills approach, while UAL failed to adapt in losing $8 million a day. UAL lost $2.1 billion in 2001 and $1.74 billion for the first nine months of 2002.
UAL’s losses continued throughout the decade. For example, it lost $792 million in Q3 2008. In 2009, UAL failed to capitalize on plunging fuel prices. Its 2009 Q3 fuel bill decreased almost 57 percent or 1.1 $1.1 billion, but the airline lost $57 million.
Contrast UAL with Alaska Airlines, which netted $13.1 million in Q1 2010, and that’s typically its weakest-earning quarter each year. Alaska ranks well in on-time performance.
Failure to keep arms length from employees. With adversarial union leaders represented at the board level, it was impossible to keep labor costs at a realistic level.
Corporate welfare. In 2002, I pointed out this disturbing incident: Behind the scenes, the Air Transportation Stabilization Board had allowed accountants from competing carriers to examine UAL’s financials. They pointed out numerous flaws; consequently, the board gave the carrier several opportunities to revise its deficient business plan. UAL failed to do so.
Again, the company dumped its underfunded pension obligations on the PBGC. CEO Glenn Tilton kept his $4.5 million pension and is paid$10.3 million a year – considerably more than his peer airline CEOs.
Management. With due respect, Mr. Tilton was hired to save the company without sufficient airline experience. He was recruited from the oil industry. Plus, it takes a strong, non-confrontational administrator to cope with such challenges, and his team wasn’t strong enough to offset his weak points.
It’s also unfortunate that Mr. Tilton failed to avoid nearly $400 million in losses on fuel hedges in recent years – despite his decades of experience in oil.
And consider UAL’s rankings in The Air Travel Consumer Report in 2008 by the Department of Transportation’s Office of Aviation Enforcement and Proceedings:
- On-Time Arrivals: Near the bottom with 27.2 percent of its flights delayed.
- Complaints: The worst.
- Baggage Mishandling: United ranked 9th out of 19 places for baggage mishandling.
To view the report, click here.
In Sept. 2011, UAL still didn’t rank well in on time flights – ranked third in flight delays at an average of 84 minutes per delay, according to Air Travel Consumer Reports for 2011.
In terms of strategic planning, UAL has not flown high, but had started to show some signs of corporate wisdom.
UAL started the process of improving its infrastructure. For example, it laid-off 36 employees at Manchester-Boston Regional Airport, and cut capacity in half because its two flights to Chicago’s O’Hare airport have been replaced by United Express and its smaller aircraft. This was part of UAL’s plan to cut its overall capacity by 10 percent.
Failure to honor tradition
Regarding the purchase of new planes, tradition and relationships should have been considered by the airline. Yes, UAL operates outside the U.S., too, with flights to Asia, Europe and Latin America with 3,300 flights to more than 200 destinations.
But my sense is UAL should have only gone with Boeing for three basic reasons:
- In recognition of its Boeing roots starting eight decades ago
- Boeing’s past goodwill in service
- Boeing’s risk-taking in extending more than $1 billion in financing to the carrier
And in customer service, UAL could learn from Alaska Airlines. I’ve flown both and there is no comparison. Connecting flights and poor customer service are a nightmare. My business associates have made similar unsolicited comments.
The new airline has a long way to travel if it’s going to successful.
From the Coach’s Corner, here are more resource links:
For more analysis regarding airline strategic planning:
Northwest Partnership Leads to Solutions for High Jet Fuel Costs
Boeing, Airbus Rivalry: Lessons in Strategic Planning.
“If black boxes survive air crashes, why don’t they make the whole plane out of that stuff?”
-George Carlin
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Terry Corbell is a business-performance consultant and profit professional. Click here to see his management services (many are available online). For a complementary chat about your business situation or to schedule Terry Corbell as a speaker, why don’t you contact him today?
Boeing, Airbus Rivalry – Lessons in Strategic Planning
Updated June 30, 2010
A major ruling against Airbus by the World Trade Organization (WTO) adds new intrigue to the Boeing-Airbus competition. The WTO ruled that Airbus has received illegal subsidies for four decades. Litigation has been ongoing for six years.
But Airbus vows to fight the ruling as it tries to land even more government funding from the European Union for its new A350 jet, which will compete against Boeing’s 777 and 787. Airbus also predicts Boeing will receive a similar adverse ruling from the WTO this summer.
So the plot in the rivalry continues to thicken. Businesses can learn valuable lessons from the Boeing-Airbus competition. In terms of strategic planning, it has been quite a roller-coaster ride with no end in sight.
Have both sides done enough strategic homework? Should major manufacturers rely on government funding?
Here’s some more history to consider:
In July, 2006, I recall writing a column suggesting that Boeing should not break out the champagne to celebrate even though Airbus was faltering. My sense was that investors would have been impressed if Boeing employees continued to act with poise and assurance – as though they expected to win sales orders – unlike many of the flamboyant Airbus stakeholders. Their behavior was reminiscent of immature athletes taunting opponents on a football field.
Airbus sales had dropped by more than 50 percent during the first six months of 2006 compared to 2007. The company was behind schedule in landing more than 250 sales, which were needed to capitalize on its $13 billion design and production investment.
Airbus was reeling from a buyers’ strike for several reasons:
- Delivery delays in the A-380, a super jumbo jet
- A class-action lawsuit and the threat of more litigation accusing management of hiding problems
- Astronomical fuel costs
- In-fighting by French and German executives at the parent company, EADS
- A management shakeup at Airbus
All these developments occurred before the deadly Airbus A-310 accident in Russia that killed the crew and scores of passengers. Yes, Airbus appeared rather vulnerable.
Since the 2006 column, the cost of jet fuel and the worldwide recession took a toll on air travel and cargo services, which adversely affected both airline manufacturers.
For example, Dubai-based Emirates airline stopped its using its Airbus 380s on flights to New York and replaced them with the smaller Boeing 777.
Meanwhile, Boeing lost its sales throne in suffering from fewer orders while still pinning its hopes on its new 787. But the Dreamliner’s production has been postponed five times. The first delivery is now forecast for Q4 in 2010 – at best, a two-year delay for the aircraft. In other words, it is the most-expensive and delayed aircraft in Boeing’s rich history.
Other Boeing challenges:
- The estimated $35 billion Air Force tanker-bid process after initially losing to Airbus
- Allegations of illegal subsidies on both sides before the World Trade Organization
- Whether to locate a second 787 assembly line outside of Washington state
- Progress of the 747-8 jumbo jet
- Production cuts because airlines are postponing jet deliveries, cutting back on new purchases and canceling orders
On the other hand, Boeing originally strategized that its highly efficient 787 Dreamliner would prove to be popular with airlines. Airbus apparently didn’t factor whether airports worldwide would want to construct longer runways for landings and takeoffs to accommodate its huge A-380. Not to mention the increasing costs for jet fuel.
Add to the competitive mix – Aviation Industry Corp. of China (AVIC) – a competitor for Airbus and Boeing. AVIC is restructuring again as a single company. It will be listed on the Hong Kong stock exchange with about $22 billion in assets. As China’s largest aircraft manufacturer, it also has one-fifth of Comac, Commercial Aircraft Corp. of China. In 2016, Comac plans a 150-seat jet for the marketplace.
So, it would be intriguing to peek at the strategic plans of Boeing and Airbus to see if they did a thorough forecast of all these developments. The positive and negative events illustrate how important it is to thoroughly explore all contingencies. That includes funding. The controversy over government funding has unnecessarily cost both sides valuable resources.
And how can a smaller business capitalize on the Boeing-Airbus case study, and maximize performance with strategic planning?
Strategic planning starts with a SWOT analysis: Analyzing your internal strengths, weaknesses along with your external opportunities and threats.
The basic categories to be evaluated in your internal operation should include:
- Management
- Product/Services
- Customer Service
- Human Resources (including likelihood of employee strikes)
- Marketing
- Operations
- Technology
- Security
- Financial
- Viewpoints of your customers
Externally, you’ll want to assess these factors:
Socio-cultural – including demographic movements, the aging baby-boomer demographic, consumer tastes, population shifts, and the trend toward healthy lifestyles.
Economic developments – consider interest rates, inflation, fluctuations in currencies, and stock market trends.
Technology – including information technology, privacy concerns, production and the Internet.
Politics – issues such as federal, state and local levels in both taxes and regulatory issues.
Industry competition – obviously, you’ll need to develop a strong awareness about your competitors.
Customer profiles – analyze your target customers’ changing characteristics, wants, and needs. Determine what you want to target in average age, income, gender, and marital status. Evaluate their buying preferences and how they feel about your industry.
Once the SWOT analysis has been completed, you can develop and implement your strategic plan.
However, many small business owners and managers fail to properly budget time for strategic planning and they fail to capitalize on the expertise of their employees. After all, employees deal with customers every day.
Involving your employees will improve their character and morale. It will also promote teamwork, which will motivate employees to higher performance. So don’t overlook their experiences and instincts, and be sure to obtain their support.
In fact, every stakeholder – from employees to customers – should be part of the comment process to help develop and implement your action plan. Identify the leaders and best thinkers in your company to help you. It will enable you to plan using your vision with goals for entering new markets and introducing new services or products, and to obtain efficiencies by developing strategies for quality.
Consider other “dos and don’ts” of strategic planning.
Dos:
- Assign a strong personality to administer the process
- Develop benchmarks for performance and results
- Anticipate how the strategic planning changes will affect your employees, processes, and culture
- Publicize the strategic plan early on and regularly
- Monitor the plan’s progress and make changes when necessary
- Reward the positive behavior of supportive employees and take appropriate action against those who fail to participate productively in the process
Don’ts:
- Don’t permit a lackadaisical attitude and employees’ resistance to change
- Don’t allow poor follow-through on initiatives
Finally, do not obsess about looking over your shoulder. Consider the teachings of author/consultant Seena Sharp on competitive intelligence, “Competitive Intelligence Advantage: How to Minimize Risk, Avoid Surprises, and Grow Your Business in a Changing World,” (Wiley and Sons).
She recommends not focusing heavily on your competition. Here’s a link to my column: Hottest Tactics to Beat Your Competitors.
From the Coach’s Corner, for an analysis on the lessons from UAL’s six strategic-planning woes, see: Losses Show Why United Airlines Needs Strategic Plan
