As Airlines Pull Out of Dive, United Charts Its Own Course

[tonyw]

It Woos Business Travelers
With Range of Services
As Rivals Cut and Simplify
DVD Players, Reclining Seats
Next month, United Airlines parent UAL Corp. expects to emerge from the largest, longest-running airline bankruptcy in history. In three years, the nation's second-largest airline has shaken up management, improved its on-time record and slashed costs by $7 billion a year.

Now United is gambling on a flight plan that takes it in the opposite direction of the rest of the U.S. industry. Determined not to be another clone of low-cost, low-fare juggernaut Southwest Airlines, United is making an all-out effort to raise revenue by pampering its best business travelers -- and keeping them on United whether they are flying to a meeting on the coast, or taking the family to Orlando. That means accepting higher costs, the very problem that drove it into bankruptcy in the first place.

In the face of rising fuel prices and continuing losses, competitors have cut back on frills and simplified their offerings across the board. United is keeping onboard blankets and pillows, making seating more spacious and designing new services for both the high and low ends of the market. The airline hopes these steps will allow it not only to charge more but to steal some customers from rivals, or, in the case of its new leisure division, Ted, to better compete with discounters.

One big risk: United is sticking with a seven-year-old program that rewards elite frequent fliers traveling in the front of the coach section with a few extra inches of legroom. The program, dubbed Economy Plus, has generated additional revenue, but it also has raised costs, because United now has fewer seats than rivals on most of its 450 jetliners. AMR Corp.'s American Airlines last year undid a similar program it launched in 2000, saying adding back seats generated an extra $100 million in annual revenue.

United has reduced the number of seats on more than 100 regional jets flying with its commuter affiliates so it could install roomier Economy Plus seating and first-class cabins -- the first time anyone in the industry has so broadly tried an upscale approach on such small jets. It radically cut the seating in a luxurious transcontinental service called "p.s." The extra room enables United to be the only airline that offers fully reclining, first-class seats on coast-to-coast flights. Now, following a big expansion of overseas routes, United also is planning a multimillion-dollar upgrade of its international first- and business-class cabins.

"It doesn't take talent to take the pillows off" planes, says [Glenn] Tilton, a former oil-industry executive who has guided United since September 2002. "In the industry's herd mentality, we were supposed to trundle down the runway of commoditization," he says. "But if you're blessed with this network, to optimize it, you overlay an array of products that people want."

Most major airlines like American and Northwest Airlines are streamlining their offerings and stripping away perks. Northwest, which filed for bankruptcy-court protection in September, no longer serves free pretzels. American's Eagle commuter subsidiary is experimenting with charging $1 for a soda. Delta Air Lines, also in Chapter 11, is ditching its leisure division, Song. On the other hand, Continental Airlines has rejected the take-back of customer perks and still offers free meals and other amenities, but the nation's No. 5 airline isn't offering as many levels of service as United.

http://online.wsj.com/article/SB1137...ys_us_page_one

Good on United. I can tell you that keeping e-plus is a big way for them to keep my butt on their metal, and I'm willing to pay more for it.

Sure, the I want the cheapest airline out there types won't fly United, but given that they're flying with 80 percent load factors, so what?

And I like how United's saying eff off, Wall Street analysts. You said be like Southwest, we're going our own way.

[shinysideup]

AMEN.... Thank God someone is taking this stance. Thats good news if you ask me.

[Kingairer]

By Ted Reed
TheStreet.com Staff Reporter
1/6/2006 7:04 AM EST
by Ted Reed

For a young, enthusiastic, fast-growing leader of the low-cost carriers that now dominate the airline industry, almost nothing could be worse than maturity.

Yet JetBlue Airways (JBLU:Nasdaq - news - research - Cramer's Take), which began flying in February 2000, is growing old before our eyes.

The carrier's stock is trading about 5% below its 2005 close, thanks largely to start-of-the-year downgrades by analysts at Merrill Lynch and Raymond James. Both said the stock price has gotten ahead of where it should be.

A key reason, said Merrill Lynch, which has a banking relationship with JetBlue, is that "the company may be experiencing growing pains (that include) rising costs related to the maturation of the company."

The problems with maturation in the airline industry are multiple. The cost of labor goes up as workers become more senior. Route expansion often progresses from the most desirable routes to less desirable ones, and maintenance costs can increase precipitously as aircraft require their first heavy maintenance checks after operating for several years.

Vivian Lee, an aviation analyst for Alliance Capital, which doesn't hold JetBlue stock, says that all new airlines start out with a "maintenance vacation" from the hefty checks that can cost a few million dollars per aircraft. A vacation's impact can be prolonged by rapid growth, because high maintenance costs would initially affect a relatively small percentage of an evolving airline's fleet. But eventually, all vacations must come to an end.

JetBlue is burdened with all the phenomena of aging at the same time as fuel costs have risen and competition has stiffened. In the third quarter, as operating expenses rose 46.1% from the same quarter a year earlier, operating income declined to $13.8 million, down 38.4%. Net income of $2.7 million came about largely from a tax-accounting benefit of $6.4 million, a result of reduced tax expectations since the company no longer believes it will make a profit this year.

"I would argue that JetBlue actually lost money in the third quarter," said Lee. CEO David Neeleman called the quarter difficult, as a result of high fuel costs, bad weather and tough competition. The airline said it would report a loss for the fourth quarter and the year.

Rising maintenance costs are likely to increase the burden on the company, which operates a fleet of 85 Airbus A320 jets. Heavy maintenance requirements begin after several years of operation, with the exact interlude determined by the usage of the airplane.

In fact, in the third quarter JetBlue's maintenance costs rose to $19.8 million, up 72% from the same period a year earlier. That followed a full-year 2004 increase of 94% to $44.9 million. The airline took delivery of 10 jets in 2000, 11 in 2001, and 16 for each of the past four years. In 2005, it also received its first seven Embraer 190s, a second aircraft type that it plans to deploy in markets too small for A320 service.

JetBlue has warned repeatedly that aircraft maintenance outlays will rise. "Our maintenance costs will increase significantly, both on an absolute basis and as a percentage of our operating expenses, as our fleet ages and (our) warranties expire," the company said in its 2004 annual report. But investors may not have been listening.

JetBlue should have been a Wall Street darling for many years after it went public, says analyst Lee. Instead, she said, "it is looking more like a legacy carrier and less like Southwest Airlines far faster than most would have imagined at its IPO only three and a half years ago.

[Screaming_Emu]

Sounds like somebody in United management read Bethunes "from worst to first". Continental had some pretty rough bankruptcy issues in the 90s, they tried Continental Lite where they took pretty much everything but the seats off the airplane, but that didn't work. They then tried making their airline worth paying a little bit extra for and it paid off.

[tonyw]

I really liked what Tilton said, when he said, taking pillows off airplanes doesn't require any thinking.

United has realized that it cannot out-Southwest Southwest. It can't be done if you have the kind of route system they have. You can't fly from Chicago to Beijing with a 737, and it doesn't make economic sense to fly a 747 from Denver to Vegas.

So they said, okay, let's see what we can do to make people pay more for us.

It's nice to see someone who doesn't fall for the "me, too" style of management.

[Bigey]

Originally Posted by tonyw

I really liked what Tilton said, when he said, taking pillows off airplanes doesn't require any thinking.

United has realized that it cannot out-Southwest Southwest. It can't be done if you have the kind of route system they have. You can't fly from Chicago to Beijing with a 737, and it doesn't make economic sense to fly a 747 from Denver to Vegas.

So they said, okay, let's see what we can do to make people pay more for us.

It's nice to see someone who doesn't fall for the "me, too" style of management.

Well, my first choice is always to check United, cuz i really do love that economy plus! They've always had good service to us also. If they can make this plan work, it'll be a good turn for the whole industry, i think!

[Chris_Ford]

Well seeing as they'll be posting an obscene profit 1Q '06, I don't think they'll have any problems for another couple of years.

[dakovich]

i was just talking with my girl about all of this stuff. i hope to god that united wins big with their new strategy. we're on a trip right now (cruise) and had to fly down to Florida on Southwest. and don't get me wrong, i dig SWA but i hate it at the same time. its a great company, good people, and they treat their customers right. only thing is that at this point i don't like the product they have to offer. too stripped down for me. after flying Continental recently i've fallen in love with the extra little perks. they treat you just as nicely at CO as at SWA, but it just feels a bit more shiny...is that a good word, shiny? i dunno, but southwest feels dull to me. kind of feels like at SWA you pay for what you get, and they hide that fact from you by being nice to you, as well as funny. honestly though I'd rather pay an extra $40.00/ticket and recieve a better overall product, something that feels "made in america". no more Walmart crap from China, that is sold so cheap that it makes people not care what exactly they're buying.

[FlyChicaga]

I will tell you, when I worked at a low-cost carrier I thought it was a great plan. Who needs these perks? Do we really need blankets on the plane? Well now working under the Continental banner, flying airplanes that still have meals and an array of other amenities, I will definitely take the latter any day of the week. I really hope the paradigm shift stops moving towards the Southwest/JetBlue way and pulls back to the United/Continental way. It is definitely nice to travel this way.

[blee256]

XJT serves meals?? I know they have crew meals (bastards!! haha, j/k) but I didnt know they pax got them too.

I also like this strategy of United. Before flying I used to work for hotels and it was all about differentiating their product from the competition. Not strip everything and sell cheap, like NW tries to do. Not to mention American Eagle selling Soda out of LAX......good luck United.