United Airlines’ Uninspiring ‘Next’ Plan Ignores Important Realities
April 17, 2022
By Ben Baldenza, Forbes
Airlines create strategic plans to help codify a business model, a growth plan, or a differentiation. One of the more famous was Continental Airlines’ “Go Forward Plan”, designed by Gordon Bethune and Greg Brenneman. This plan galvanized the company and set clear priorities for many years. Many strategic plans are like mission statements on steroids, meaning a more detailed vision of how the company will operate and what defines its core values.
United Airlines has just released a new plan, called “United Next”. Faced with a massive order of new airplanes that will be used to replace older equipment, upgrade regional flying, and add growth, the company needed a way to put this order into context. This is a four-part plan, divided into pillars, meant to inspire and rally the company for rapid change and growth in the coming years. However, the plan does little to outline in any detail how they will do any of this and looks instead like a simplified plan that is a retread of main ideas from any airline plan, like running reliably and being nice to customers.
Pillar 1, Fleet Growth
This pillar of the United plan is why the plan exists at all. United has 500 planes being delivered in the next five years, a huge operational and logistical challenge. The announcement of the plan highlighted how difficult it will be to find the pilots needed for the planes, and how more airport gates will be needed. These are true, and with an average of two planes every week for five years means this will be a Herculean task.
Not considered in this is also the retirement and likely lease return of other airplanes during this same time. Plus, extra cycles of pilot training into new equipment, especially those moving from regional jets, will mean a higher percentage of the pilot hours will be paid for non-revenue producing activities.
Pillar 2, Operational Excellence
This pillar is focused primarily on operating on-time, including pushing back on-time even when connections might be missed as a result. The odd thing about this pillar, like the next one as well, is how simplistic and basic it is. Is United saying that they do not strive for operational excellence today, but rather must have this is in a rolled-out plan to get their team focused?
The Department of Transportation measures airline on-time performance and undoubtedly United, like other airlines, watches this all the time. They also, again like other airlines, pad their flights with extra time to help look better on this metric. Does this mean they will re-think every aspect of the aircraft turn at the gate, or maybe even revise maintenance procedures to ensure better operations? There are many reasons that airlines don't operate reliably, and while much of this is controllable, some of it is not. United has regularly performed as a middle-of-the-pack airline, so does this plan say they will spend more money, reduce utilization, and use more people to perform better, or excellently?
Pillar 3, Customer Service
Like Pillar two, this one begs the question —does United not focus on customer service today? Here they focus on Net Promoter Score (NPS), a Bain-created metric. NPS asks this question to each buyer of a service; how likely are you to recommend this service to a friend? Answering from 1-10, 0-1 answers are consider detractors while 9-10 scores are considered promoters. One point for every promoter less one point for each tractor gives you your NPS score, meaning answers between 3 and 8 are effectively ignored. NPS scores can thus range from -100 to +100.
There are two challenges with NPS and airlines. One is that NPS has no historical correlation with airline earnings. Airlines with lower NPS scores do not necessarily perform less well financially. The second challenge with airlines is that NPS scores vary wildly with operational reliability. When the flight is on-time, the NPS scores tend to be high but when the flight is late, even on a generally well-regarded airline, the NPS scores suffer. Often what distinguishes a reliable airline from an unreliable one is what happens when things go wrong. Using NPS as the primary gauge of customer service ignores many things that customers care about, including attention from flight attendants, shorter airport lines, better tasting food, not paying for a checked bag, and many more.
Pillar 4, Unit Cost Control
The United Next plan focuses on technology as a way to keep unit costs under control, even while inducting hundreds of new planes, training a lot of crew, and doing more to run efficiently and earn higher NPS. The problem with this is that the largest two costs any airline faces are labor costs and fuel. If they are talking technology to replace labor, that might make sense as a cost control but not likely to be well received by a plan meant to fire-up the team. New engines on the new planes should be more fuel efficient for sure, but those new planes are going to drive high ownership costs.
Running large hub and spoke operations also doesn’t correlate with low unit costs. These kinds of operations require a lot of gates, and peaked use of facilities and labor. They also reduce aircraft utilization, or time the plane spends in the air, since many planes have to be on the ground at the same time and can’t depart until all the passengers and the bags have been moved from other planes. These kind of hubs are good for generating a lot of passengers, but at a real cost. It’s not clear to me how technology improves this significantly.
Four Realities Not Addressed In The Plan
Any good plan addresses not only aspirational objectives but also reflects realities in the business. The United Next plan, at least as it has been revealed to the public, misses four key things that United is facing that will make it hard to meet its goals. The most obvious of these is labor, not only in the forms of pilots already mentioned. Airlines use a lot of people, and United’s plan to grow significantly and operate big hubs will mean even more people than normal. This will put enormous pressure on their salary, wages, and benefits line in addition to creating challenges of how to stay staffed for peak times.
The next issue not addressed in the United plan is the structural change in business traffic. With the latest studies suggesting that up to 40% of business traffic may not return, United’s fleet growth and business market focus will possibly have to be productive with a large increase in price-sensitive leisure travelers. Being the world’s “biggest and best” airline, as CEO Scott Kirby states with this plan, may require that business travelers will all return to be successful. Not even addressing this challenge brings skepticism to the plan. A corollary with this is the fast growth of lower-cost, leisure focused airlines. With the latest IPOs and startups all focused on leisure travelers, it is this segment of the business that is gaining new investment and growing at rates even faster than United plans to grow. How United will maintain a price premium, needed for their high cost structure, is not obvious.
The fourth and final reality is United’s lack of price control in their hubs. Delta, with the lion’s share of resource and schedule in Atlanta, Minneapolis, Detroit, New York’s LaGuardia, and increasingly Seattle, gives them almost no competition for their local traffic, especially among those who will pay up for better service or a non-stop flight. Similarly, American is in this strength position at Dallas, Miami, and Charlotte. United spilts Chicago’s O’Hare airport with American, has two lower-cost hubbing airlines fighting for traffic in Denver, and operates in Newark that has lost its slot protection and has had a big increase in low-cost carrier capacity. At Houston’s IAH airport, United has a Dallas or Atlanta-like presence, but the market isn't as large and still has Southwest with a large operation driving the local prices across town at Hobby airport. As result, United competes for travelers at every price point on most of its network. Replacing regional jets with big jets increases this challenge, it doesn’t fix it. A lot of growth could end up being lot of new capital that provides little to no return on its investment.
If some one told you there was an an airline with a plan that was based on running reliably, being good to customers, and controlling costs, you would first ask “okay, what makes this different from any other airline in the world?” That’s the real problem with United’s Next plan. It’s all based on adding 500 planes in five years, a challenge that no doubt needs a lot of focus. The plan United really needs would include “rebuild relationships with all of our employees”, “find a way to own our major hubs”, “act like customers aren't in our way”, and “ignore ULCC growth since we don't want their low-fare paying traffic anyway.” As it is, United “Next” looks more like United “Past”.