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Issue Date: Oct 13, 2003
Outsourcing flies UAL into uncharted skies
October 13, 2003
By Paul Merrion
Virtual airline: UAL's Amos Kazzaz says turning over functions such as fuel purchasing and cargo handling to outside specialists will save money.
When United Airlines closed maintenance hubs this summer in Indianapolis and Oakland, Calif., triggering howls from thousands of mechanics whose jobs were outsourced, it was just getting started.
Below the radar, the nation's second-largest carrier is becoming something of a virtual airline as it quietly turns over more functions, such as cargo handling, airplane cleaning and fuel purchasing, to outside firms.
Individually, these outsourcing moves have been too small to gain much attention. Collectively, however, the savings from outsourcing and other cost-cutting moves eventually will add up to about $900 million a year, according to a United official — a large chunk of the $5-billion reduction in costs the carrier has achieved since filing for bankruptcy last December.
"There are more than 80 projects that drive these savings," says Amos Kazzaz, vice-president of financial planning and analysis at United parent UAL Corp., who heads the Business Transformation Office of the Elk Grove Township-based holding company. "There are always those who are specialists. We looked to outside parties who can do it better."
The risk, however, is that things don't go as smoothly as planned, as is the case with outsourced cargo operations at O'Hare International Airport. There are new distractions for management at a time when survival is the top priority. And, of course, there's the issue of employee morale.
There's not much United's unions can do, "other than screaming about it," says O. V. Delle-Femine, national director of the Aircraft Mechanics Fraternal Assn. (AMFA), which has seen more than 2,000 mechanics and about 850 cleaners replaced by outside firms. "They've got carte blanche."
His union replaced the International Assn. of Machinists (IAM) as the collective bargaining agent for United mechanics and airplane cleaners over the summer, shortly after the IAM agreed to accept outsourcing and other concessions. AMFA's lawyers are now looking for loopholes. "We're going to fight it," he adds. "Nothing is in stone."
United expects to save only about $5 million on $2.8 billion in annual fuel expenses by turning over jet fuel purchasing and hedging operations to Morgan Stanley Capital Group. Yet, the big benefit of joining forces with the New York investment bank is that Morgan Stanley will carry the inventory, freeing about $250 million in working capital to bolster United's cash position.
UAL executives have told union officials that outsourcing plane cleaning to several companies around the country — including Philadelphia-based Aramark Corp. at O'Hare — is expected to save $4.6 million at O'Hare and more than $20 million nationwide, according to AMFA official William Skjoldager. "We're being phased out," he adds.
The question is whether these savings alone are enough to ensure United's survival — and, of course, the answer is no. One Wall Street analyst likened outsourcing to "rearranging the deck chairs on the Titanic" unless United can reduce additional billions of dollars in near-term pension contributions, finish hammering out lower-cost aircraft leases and present a credible business plan to investors so that it can line up the financing it needs to exit bankruptcy.
However, by chipping away now at a costly culture and union work rules that dictated doing almost everything in-house, United is laying the groundwork to be more profitable in the future, if it survives bankruptcy intact.
"There are going to be some growing pains here, but it's still a winning strategy," says Joseph Schwieterman, director of the Chaddick Institute for Metropolitan Development at DePaul University in Chicago and a former United strategic planning specialist. "United can't move as quickly as an outside contractor to increase productivity."
While it's far more common for smaller carriers and discount airlines to outsource much of their cargo handling, ground services and other operations, United is using its new labor agreement and the protection of Bankruptcy Court to press further into outsourcing than its larger competitors.
For example, American Airlines outsources overnight cabin cleaning but not cargo handling, says a spokeswoman for the unit of Texas-based AMR Corp.
But things can go wrong. Between lost shipments, late deliveries and miscommunications, a variety of large and small Chicago-area freight handling companies say they are reeling from United's hiring of Swissport International Ltd. to handle cargo at O'Hare, starting last month.
For Itasca freight forwarder AIT Worldwide Logistics Inc., a major user of United's cargo services, "one of our greatest strengths was that we knew who to call" in every part of the carrier's network, says Vaughn Moore, vice-president of sales and marketing. Now, he adds, "It's like you throw your whole Rolodex out and start over."
Zurich, Switzerland-based Swissport and Texas-based Worldwide Flight Services Inc., formerly a unit of American Airlines, are replacing United employees at 17 warehouses across the U.S. Both companies have extensive, worldwide experience in freight handling operations. The cargo sales and customer service call center, whose Chicago workforce has been cut almost in half, to 60 employees, in recent months, will soon be outsourced to Texas-based Electronic Data Systems Corp.
Cargo shipments drop
The result may be lower costs, but United also reported a 31.1% drop in cargo shipments in September, compared with only a 2.9% decline in passenger revenues per mile flown.
"We were using United on a regular basis, but we're holding back on putting things through there until things settle down," says Janet Dahl, Chicago district manager for New York-based Concordia International Forwarding Corp. "We knew the day they were going to turn everything over to a new handling agent, so we've just avoided it."
UAL's Mr. Kazzaz acknowledges there were start-up problems in cargo outsourcing at O'Hare, but he insists the freight operation is running more smoothly now.
"It's not yet at the expert level of where it was, but certainly a great deal improved from the initial transition that took place Sept. 7," he adds.
Says AIT's Mr. Moore: "We're both hometown players and we're going to make it work. It has not been a good transition so far, but they are working very diligently to make it work. It's important to their survival."
©2003 by Crain Communications Inc.
