Ted tests UAL's skill at trimming costs - Will 18 more seats keep it flying?
By Paul Merrion - November 24, 2003
CHCAGO (Crain's Business News) - The marketing hoopla surrounding Ted obscures the fundamental question of whether United Airlines' new high-concept, low-fare airline-within-an-airline can compete profitably with fast-growing discount rivals.
As it prepares for takeoff from Denver to 12 vacation destinations in February, Ted is flying into a stiff head wind of skepticism about its ability to bring costs in line with lower fares.
"It could be even less profitable than the main line," says Robert Mann Jr., an aviation consultant in Port Washington, N.Y. "If the costs aren't much less and the revenues are much less, the economics aren't as good as for the main line."
Skeptics note that United still has higher costs than any low-fare airline, even after Elk Grove Township-based parent UAL Corp. laid off almost one-fourth of its workforce and won $5 billion in labor concessions and other annual cost savings in Bankruptcy Court over the past year.
United is the latest of many struggling airlines to spin off a low-fare venture in recent years, none of which — including Shuttle by United, which was shut down in late 2001 — have succeeded against the all-discount carriers, such as Dallas-based Southwest Airlines.
The 1½-cent difference
As of Sept. 30, United's costs were 9.88 cents per available seat-mile, an industry benchmark measuring costs across every mile each seat is flown, vs. 8.34 cents for Frontier Airlines, its main rival at Denver.
That penny-and-a-half puts United's costs more than 18% higher than Frontier's. "That could make a big difference," says New York-based Blaylock & Partners analyst Ray Neidl.
Although United's unions refused to work under separate, lower pay scales, company officials insist that Ted will bring its costs in line with discount competitors'.
Ted's costs "will be lower than the restructured" United's costs, says Sean Donohue, UAL's vice-president in charge of the low-cost carrier. "Where we're deploying (Ted), we'll be cost-competitive with other airlines in that market."
Ted's game plan is to remove the first class section and install 18 more seats on its Airbus A320 planes, increasing revenue-generating capacity about 11%. However, labor costs per flight also will go up because federal safety rules require a fourth flight attendant to cover the added seating.
"The revenue contribution of 18 additional seats significantly exceeds the cost of an additional flight attendant," says Mr. Donohue. "We're very confident we'll fill those seats."
Finding online savings
United is counting on marketing buzz and a simplified fare structure to steer customers to Ted's Web site, saving fees charged to the airline for tickets sold through other channels.
But Ted's major challenge will be to fly planes upwards of 11 hours a day — two hours more than the main carrier's average — cramming in more flights with shorter stops.
That means management and employees will have to work harder and smarter to get planes in and out of airports faster.
United is planning new procedures, such as using both the plane's front and rear doors for passenger boarding and departing, but it's just starting to discuss with employees and union officials what the new airline will entail. If nothing else, Ted represents a chance for a fresh start in United's long history of labor-management turmoil.
"A lot of employees are happier if they're kept busy, as long as it's not back-breaking work," says Ira Levy, assistant general chairman for the International Assn. of Machinists in Denver, which represents baggage handlers and other airport workers. "It's become obvious to employees that the jury's going to be out on Ted, internally and externally, until it produces."
