CHICAGO--The airline industry "needs to go through another
recession to prove we can," Rono Dutta, United's senior vice
president of planning, said.
Investors shy away from airlines because they believe they don't
weather cyclical downturns well, Dutta said, but he wants to prove
that United is ready for the next one.
At a "media day" gathering here, Dutta said United has developed
four defenses that will cushion the blow of the next recession,
which some economists predict is on the horizon:
Capacity deployment is crucial, he said, because the airlines
are just as sensitive to capacity cycles as they are to economic
cycles. Capacity continued to grow well into the recession of the
early 1990s, during which the world's airlines lost more than they
had earned during the entire history of commercial aviation. This
time around, United and other airlines, notably American, are using
their 727s as a "fudge factor." They are hanging onto the old
planes, rather than replacing them, so that if bad times come they
can be retired quickly, instantly shrinking capacity to match lower
demand.Route diversification--not putting all your eggs in too few
baskets--provides another cushion, Dutta said. In 1991, 68% of
United's revenues came from domestic operations; the Atlantic
accounted for 6%, the Pacific for 26% and Latin America played no
role. In 1997, the breakdown was healthier: domestic, 66%;
Atlantic, 10%; Pacific, 19%, and Latin America, 5%.Customer loyalty and yield management will play a significant
role, Dutta said. United's frequent flyer program is the world's
second largest, with 25 million members. Recognition throughout the
Star Alliance system--United, Air Canada, Lufthansa, Varig, SAS,
Thai, Air New Zealand and Ansett Australia--makes Mileage Plus even
more attractive, Dutta said. That and United's focus on customer
service have boosted its share of business travelers, which in turn
boosts yields.Cost management in bad economic times has gotten a bad name,
Dutta noted, citing the "trashing of the product" that occurred the
last time around. But United's costs are under control, he said, as
evidenced by its operating margin, much higher than it was on the
eves of the last three recesssions. In 1975, its operating margin
was 8%, dropping to -0.2% in the throes of the recession; in 1979
it was 8.2%, dropping to -7.3%, and in 1990 it was 4.7%, dropping
to -4.2%. For the year ending last June, United's operating marging
was 13.3%, and it projects profits if a recession hits next year.
In other topics covered during the media day:United next month will test a carry-on baggage "template" that
will fit over X-ray machines. If the bag doesn't fit through the
opening, it will not go on the plane. Christopher Bowers, senior
vice president for North America, stressed that on concourses where
United shares security checkpoints with airlines that don't want to
use the templates, United still will monitor the carry-on situation
religiously. With planes more crowded than ever, he said, the
carry-on problem is wreaking havoc with on-time performance since
aircraft doors can't close until room is found for everybody's
carry-ons.Delta remains the "best" domestic partner for United, Bowers
said, because "if you're looking for a partner with minimum
overlap," the list of candidates is "pretty slim." Although Delta's
pilots have nixed the carriers' plans to share codes, the frequent
flyer reciprocity is still a strong tool, Bowers said.Chairman Gerald Greenwald's retirement next summer when his
contract is up apparently is not a sure thing with the recent
resignation of John Edwardson as president at the urging of the
airline's unions. Neither is it clear that new president James
Goodwin is a shoo-in for the top job. He deflected questions about
whether he even wants the chief executive title, although as a
32-year veteran who has worked in nearly every department, he said,
"I know this industry and I know United."