Does United Seem Too Optimistic?


Nov 21, 2003
Does United seem too optimistic? Maybe
By Caroline Daniel in Chicago
Published: June 13 2004 22:04 | Last Updated: June 13 2004 22:04

It has been a steep and brutal learning curve for Glenn Tilton, chief executive of United Airlines, who joined the company more than 20 months ago as a 32-year veteran of the oil industry with little aviation experience.

Sitting in a hotel room in Chicago, Mr Tilton still seems energised by the intellectual challenge of restructuring United and leading it out of bankruptcy.

But he also seems defensive about criticism. "Have you flown United lately? Does it feel bankrupt? Does O'Hare look bankrupt to you? Do the employees look bankrupt? No."

His reaction is no surprise. To Mr Tilton's personal chagrin, United's rivals have lobbied aggressively against the company, seeking to derail its chances of securing a critical $1.6bn federal government loan guarantee.

That is not the only external challenge. An unexpected $700m jump in fuel costs this year has delayed United's return to profitability until at least next year.

The next two weeks could decide success or failure of Mr Tilton's restructuring efforts, as the decision by the Airline Transportation Stabilisation Board on the loan guarantee looms.

Mr Tilton argues that two strategic assets work in United's favour. The first is its route network.

"United has the best opportunity, and has always had, of the network carriers. We simply hadn't taken advantage of it.

"We are criticised for being poor stewards, historically, of this competitive opportunity.

"But now, being significantly better than we were 18 months ago, we can avail ourselves of the opportunities that Chicago, Denver, San Francisco, Dulles, the Pacific, Norita, Ho Chi Minh City present to us."

Second, he says United's labour contracts, revised during bankruptcy, will deliver $2.5bn of annual savings. These constitute a "foundational asset that none of the other folks at network carriers have available. We have a six-year contract with their growth rate of only 1.2 per cent per year, no re-openers and no snap backs."

In spite of this, United remains loss-making, reporting some of the highest costs per available seat mile among the network carriers. Although United's cost reduction efforts seemed sufficient a year ago, the revenue environment and a $750m rise in fuel costs spell further losses this year.

This changed environment has forced a cost rethink across the sector. Some airlines, such as US Airways, are even more aggressive than United, seeking to adjust to low-fare competition by cutting an additional 25 per cent of labour costs.

There are also some concerns that United is too optimistic about revenue trends. The airline's plan, according to one industry consultant who has seen it, assumes seven years of uninterrupted unit revenue growth, with a robust rebound this year, followed by about 2-3 per cent growth from 2005 onwards. By contrast, unit revenue growth for the industry fell on average by 1 per cent a year over the last 25 years.

Mr Tilton declines to go into details, but says: "We would have been, excluding fuel, talking about a cylical recovery of some magnitude, in the peak travel season.

"It may have been less than expected, but we would have been pointing to margin improvement - all of us."

The concern about revenues has prompted a request from the ATSB that United test its plan against more pessimistic revenue assumptions.

"As a result of these stress testings on the revenue side, we got the revenue growth down to zero over the course of the plan. We [could still] repay the loan," Mr Tilton says.

A ratings agency hired by United, believed to be Standard & Poor's, also concluded that United would be able to repay its obligations, including more than $4bn of pension obligations, even "under the most extreme scenario," he added.

One might therefore expect Mr Tilton to be confident of obtaining the loan. Yet he remains cautious, sidestepping the question three times. Instead he says: "It is an opaque process. I'm confident about the work done."

He adds: "I'm confident about the business plan and the upside of United. I'm confident about the strength of the advice I have received from banks - who happen to be the two largest banks in the world."