Over the last year, United Airlines has been requesting that the U.S. government guarantee its finances so it can continue operating in the face of massive losses. The government has been reluctant to agree. Facing a cash crisis, last week United Airlines informed its employees it planned to discontinue contributions to the employee pension fund. Understandably, the employees were angered and voted “no confidence” in management. Meanwhile, the whole mess is finding its way into court for lawyers to decide the future of the airline.
Who’s winning here? No one… not even customers. Lines are longer, waits are longer, on-time performance is still an issue. Customers regularly complain about harsh service from employees, a dropping of food service, poorly handled (or lost baggage), and a very unsatisfactory traveling experience. Travel agents are out of the equation; disenfranchised as commissions have practically disappeared over the last few years. So investors, employees, distributors, customers and even suppliers (Boeing, the airport authorities, etc.) are all losing.
What’s the problem? Everyone who doesn’t manage an airline has known that United was on a collision course with disaster for over 20 years. Their profits have been nonexistent to abysmal – even in the go-go 1990s. Every union negotiation cycle has been a request for concessions, and more concessions as their employees (from pilots to flight attendants and mechanics) have been asked to give up pay in order to keep the airline afloat. And then, on September 11, 2001 the whole system was grounded for a week. This provided everyone an opportunity to re-evaluate the future plans. Yet, as quickly as possible, United went right back to the same old, unprofitable, dismal business model.
United bought into a strategy over 30 years ago of “hub and spoke,” which was fed by a desire to be the biggest airline. It was their belief, after deregulation, that the hub and spoke system would be profitable if they could only generate enough volume. Of course, this was a myth. Volume only generated more losses. The pricing mechanisms, designed to “tweak” extra profit from the system, only upset customers as it became hopelessly complicated beyond even the understanding of the employees. And, of course, no matter how much they discounted to win volume, someone else discounted even more — keeping margins at unsustainable levels for operating an ongoing business.
United became so committed to its Success Formula that it was willing to do anything to try and make it work. United has been more willing to sacrifice its profits (thus its investors), its employees (to layoffs and pay cuts), its vendors, and its customers than its failed success formula. United keeps holding out trying to make that Success Formula work – long after any average business student could see it had no hope of working.
Not to mention a competitor, Southwest Airlines, which has shown that alternative models can be far, far more successful.
Only a fool would continue to back United in its efforts to make its Success Formula work. Let’s hope that fool doesn’t become the taxpayers.
