Did you expect anything different with Jeff at the helm of the ship.
by Joe Brancatelli May 02 2012
Two years after United Airlines merged with Continental, passengers, employee unions, and even United executives are in revolt. It's time to hand out the dishonor one more time.
United Airlines CEO Jeff Smisek, shown here at a December 2010 speech, made himself the public face of the United-Continental merger.
Image: Ian Waldie/Bloomberg via Getty Images
A Seat 2B column on the dreadful state of United Airlines in 2008 cribbed a line from The Simpsons for its headline: "Worst. Airline. Ever." Four years later, there's ample reason to revive the line and dub the United Airlines of 2012 "Worst. Airline. Ever. Again."
Two years to the day after it announced its merger with Continental Airlines, United is lagging its competitors among the legacy carriers by most any financial measure or service metric. The airline's fractured employee groups are unhappy, and C-suite executives are bolting. Many of its best and most profitable customers are in open revolt, and average travelers are filling United's Facebook page with tales of woe. The airline's management seems alternately clueless and arrogant and unwilling or unable to fix what's gone awry.
Where did it all go wrong for United—again? You really can date this particular downward spiral to May 2010, when then chief executive Glenn Tilton finally managed to unload the carrier on Continental Airlines.
Regardless of what you think about the efficacy of airline mergers in general and this "merger of equals" in specific, the news that Continental Airlines' management crew would essentially take over United was universally considered positive. After all, Continental was then unquestionably the nation's best and best-run legacy airline, and United under Tilton had floundered even after emerging from the longest, costliest bankruptcy in aviation history.
But the road to building the world's largest airline has been fraught with peril. Two months after it switched the merged carrier onto the "passenger service" computer systems and website used by premerger Continental, United Airlines is tanking again.
When you filter out $166 million of special charges, most of those attributed to merger costs, United reported a loss of $286 million in the first quarter. That's more than double the $136 million it lost in 2011's first quarter and nearly as much as all of its legacy competitors combined. While United was falling deeper into the red in the traditionally weak first quarter, Delta Air Lines and US Airways cut their respective year-over-year losses by around 80 percent. Even bankrupt American Airlines was able to chop about 40 percent off its quarterly loss compared with 2011.
United's PRASM, a key indicator of revenue in the airline industry, also slumped. Its first-quarter growth was essentially cut in half compared with its 2011 performance, and its revenue gains lag Delta, US Airways, and American. United management is clearly worried about its second quarter too. Just hours after it reported first-quarter earnings, it publicly launched a targeted promotion offering many travelers a chance to earn 25,000 bonus miles (that's enough for a restricted domestic ticket) if they fly as few as four roundtrips.
United's operations are also taking a hit. According to FlightStats.com, United finished dead last in on-time performance in March, 12 percentage points behind legacy-carrier leader US Airways. Through April 27, FlightStats.com reports that United was dead last again, this time 10 points behind US Airways. Through April 27, United also canceled more than twice as many flights as Delta—even though Delta operated nearly 20 percent more flights than United.
The airline's woes are also affecting the carrier's employees. On Monday, the union representing pilots that flew for premerger United asked the National Mediation Board to release it from negotiations. The pilots also went public with a contentious website detailing their frustration at the slow pace of negotiations aimed at forging a contract to combine premerger United and premerger Continental pilots. Other labor groups are also working without a combined post-merger contract too.
The skies aren't so friendly in United's C-suite, either. One of the few premerger United holdovers, chief information officer Keith Halbert, quit last year after reportedly warning that the plans for the computer transition were inadequate. And just a few days before last week's dismal first-quarter numbers were released, chief financial officer Zane Rowe abruptly departed for a sales job at Apple. Rowe's exit raised eyebrows, not only for its timing, but also because he'd been with Continental since 1993 and was part of the core group that arrived to manage United after the merger.
As far as flyers are concerned, the merged United is a messy mash-up of inconsistent aircraft and inexplicable travel policies run by a management team that never accepts blame, almost never apologizes, and seems unalterably opposed to presenting a truly merged product that customers want to purchase.
Take the current fleet of 700 full-size, or "mainline," jets, for example. Premerger United's planes were older, the passenger cabins were not always in the best repair, and the aircraft were configured with four general service types: an aging first class, a substandard business class, coach, and Economy Plus, the carrier's breakout premium-economy concept that helped it survive bankruptcy. Premerger Continental's fleet was the youngest in the industry, and planes were configured with just three service types: first class, an industry-leading international business class, and coach.
It took months for United chief executive Jeff Smisek and his crew to commit to adding Economy Plus to Continental's aircraft. Even now, the retrofit is far from complete. Worse, Smisek chose not to rationalize the combined carriers' international premium products. Instead, he took the cheap way out and simply rebranded the cabins. The resulting Cabins of Babel have been complicated further as United swaps planes around the carrier's global network with little or no notice. Travelers facing long-haul overseas flights now never seem to know whether they'll get a plane with Economy Plus or if the international business class they've booked will turn out to be premerger Continental's top-notch product or the inferior premerger United version.
United has also infuriated its most frequent and profitable flyers, the elite players in the airline's MileagePlus program. The lowest-level elites are angry because the program reduced their benefits in the area of free baggage allowance and access to seats in Economy Plus. Mid-tier elites are fuming because their bonus miles have been slashed. And the super-elites, called 1K and GS (for Global Services), are livid because the data conversion in March targeted them for the worst service. For weeks, their calls were stuck in long queues, their emails were ignored, and, worst of all, their upgrades and seat assignments were lost.
Although putting too much weight on the whinges of posters at FlyerTalk, the frequent-flyer bulletin board, is sometimes dangerous: Their complaints about MileagePlus now exactly mirror the grievances of virtually every United frequent flyer I've interviewed. Their complimentary upgrades—the glue that binds business flyers to their carriers—simply weren't materializing as promised, and general travelers with no elite status were being sold cheap upgrades that the elites never had the chance to buy.
United insists that the systemic failures in the upgrade process have been solved, but admits that other fixes (mostly to bring the new MileagePlus up to the standards built into the premerger United program) will take "several months." Worse, United management continues to be mute on the underlying problem: Even if they wanted to, United's elite flyers never get a shot at the inexpensive upgrades being peddled to general travelers.
Selective mutism and outright disdain for the truth has become a hallmark of post-merger United management, however. It did little to prepare travelers for the March 3 data-management transition and nothing at all to manage expectations about the problems that were sure to crop up in such a complicated process. When problems developed, United spokespeople issued provably false and misleading statements.
The first, niggling apology for the woes of those initial weeks of the data transition didn't even come until nearly a month had passed and issues such as long telephone holds, lost reservations, and canceled seat assignments were still plaguing travelers. And as recently as two weeks ago, Smisek made astounding claims about the problems. One of them: Systems glitches weren't actually mistakes but "gaps" that United management knew about but didn't think customers cared about.
It took until last week's earnings call with securities analysts for Smisek to unreservedly apologize to customers for the awful state of United. Unfortunately, however, most United customers have never heard it because analyst calls are not open to the public—and you have to wonder about the sincerity of a mea culpa uttered in such a closeted forum.
Despite his reticence to publicly take ownership of United's problems, Smisek is at the heart of the battle between the airline and its most-frequent flyers, who last week were so quick to jump on a status-match offer from American Airlines that American was forced to briefly shut it down.
The reason for the personal enmity between Smisek and his best customers? Before things started going sideways, Smisek chose to make himself the public face of the merger. He put himself in the safety and promotional videos that are shown on virtually every one of United's 5,600 daily flights. And, like any chief executive, he's constantly touted improvements in products and processes that he said the merged airline would deliver.
The problem now, of course, is that the markets, the statistics, and his customers don't agree with him.
The Fine Print...
Without stretching the Simpsons metaphor too thinly, you can be forgiven if you want to cast Smisek as the moneygrubbing Mr. Burns of United Airlines. According to an Associated Press analysis, Smisek more than tripled his total 2011 compensation package, to $13.4 million. In contrast, Delta chief executive Richard Anderson, who led the carrier through its mostly successful merger with Northwest Airlines in 2008, settled for a 10 percent raise last year, to $8.85 million.
But Jeff (in all his smugness) says he's the best, United's the best and they have the best of everything, every time he the safety video starts.
Just carrying on the tradition of "worst airline CEO" Glenn Tilton. Maybe it was in their hiring contract.
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It seems to me that Delta is willing to spend money to make money. The two case in points were the quick pay raises and joint contract to get the Northwest and Delta pilots merged, and now buying a refinery in order to try and reduce/control fuel costs to a greater extent.
Jeff's happy to have the labor groups fight over a new contract while not offering them anything new.