No U-2

[wts54]

Plan for budget carrier dropped
By Heather Draper, Rocky Mountain News
February 1, 2003
UAL Corp. has backed off its controversial plan to launch a low-cost carrier as a separate airline after union members said there was no way they would back such a plan.
Sources close to the bankrupt company said Chicago-based UAL is still pursuing starting a low-cost carrier, but flying it as a UAL Corp. airline.
Late Friday, the union representing United Airlines flight attendants confirmed that, saying in a letter to workers that it is assured that United is not entertaining operating this competitive element as a separate carrier.
UAL Chief Executive Glenn Tilton had floated the idea to the unions of UAL spinning off a low-cost carrier as an entirely separate company, but it was met with harsh opposition.
The pilots and the flight attendants publicly berated the plan, saying spinning off a separate airline would break up United Airlines and force senior United employees to start over at a new company at much lower wages.
The plan to form a separate, startup carrier by siphoning off United''s best assets may be a good plan for the new startup carrier, but it will be the demise of United Airlines, the Association of Flight Attendants said in a letter to employees on Wednesday.
Tilton and UAL senior management presented their blueprint for reorganization to the UAL board of directors on Thursday. UAL has not made its preliminary plans public.
The board, which includes representation from two employee unions, unanimously supported the preliminary plans laid out Thursday, which didn''t include the separate airline idea, sources said.
Pilots union spokesman Dave Kelly said he still hadn''t seen the full plans yet but that his understanding was that the board made it clear to Tilton that it was not interested in a low-cost carrier as it was earlier presented.
They basically said, ''If your vision means a separate corporation, we are not interested in pursuing it,'' Kelly said of the board.
UAL spokesman Chris Brathwaite wouldn''t release details Friday about the company''s plans for a low-cost carrier, but said the entire board - including Paul Whiteford, the pilot''s representative - was behind UAL management''s preliminary ideas to get the company out of bankruptcy.
The board will be fully engaged in this process going forward, Brathwaite said. The next step will be to continue sharing the plan with our employees and our constituents.
UAL presented its reorganization framework to advisers for its creditors committee on Friday.
The company will hold a daylong officers meeting Feb. 10 to discuss its reorganization plans, according to a recorded message to employees on Friday.
Tilton and other senior UAL managers will then fly to different United Airlines hubs on Feb. 11 to present the plan to employees and other constituents, the message said.

 

[KCFlyer]

So perhaps UAL could adopt the better model which would mean fewer fare buckets, less difference between advance purchase and last minute fares, fewer restrictions and penalties for changes, and promote UAL mainline as offering value for the travel dollar. That doesn't mean they become another Southwest or Jetblue, just that they offer reasonable fares that allow them to make money, and don't depend of raping the last minute traveller to subsidize the guy you sold a ticket to for below cost. They can also avoid the additional layers of managment that would be required to run the "airline within an airline".

 

[ual747mech]

It's about time the board of directors(especially labor representatives) started doing their job. They should've started looking out for the interest of the employee's and what's best for the company back when the US Air buyout was presented to them. Way to go BOD's, veto management's proposals if it doesn't make good business sense. Look's like you(BOD's) finally learned your lessons.

 

[flyhigh]

KCFlyer,

Fatal flaw in your note...the low fare people subsidize the high fare people, not the other way around...

 

[KCFlyer]

[blockquote]
----------------
On 2/1/2003 11:01:19 AM flyhigh wrote:

KCFlyer,

Fatal flaw in your note...the low fare people subsidize the high fare people, not the other way around...
----------------
[/blockquote]

I'm confused...how does a person flying for a fare that doesn't cover costs subsidize anything?

 

[flyhigh]

Unfortunately, it isn't the ONE solution to the problem. Solving the problem also includes paying employees a more rational wage when compared to their productivity. Either UA's employees need to be more productive OR they need less compensation.

As for the subsidization issue...
A) low-fare pax do cover costs, variable costs, which is sufficient from an economics point of view to justify.
B)Consider the fact that our product is perishable first. Add to that the fact the the least price-sensitive pax are only able to make their decision at the last minute and need options (refundability, stand-by capability, etc.). A flight is loaded into a res system up to 350 days before departure. So, for 320-330 days it just sitting there because you have one price. This explains the regulated era. The one price is very high and cost-prohibitive for most willing travelers. Demand for the 100 seat plane is 35 full fare pax. That leave 65 seats to perish at 1 hr before departure (because of security and time it takes to get to a gate). Well, I can lower that biz fare a litte (which has happened given inflation!) if I offer those 65 seats at a discounted fare that is restricted.

It's called revenue management and everybody's doin' it!

 

[Bostonblue]

Per kcflyer

"perhaps UAL could adopt the better model which would mean fewer fare buckets, less difference between advance purchase and last minute fares, fewer restrictions and penalties for changes, and promote UAL mainline as offering value for the travel dollar."

Good post, UAL needs to look at increasing revenue, not dropping flights and giving so many flights to Star and UAX.

Your suggestions seem to me to be one solution to UAL's problem.

Bostonblue

 

[casual rat]

The only problem is that your competitor smells blood and slashes his fare to make you lose more money than he does (since he has less seats). The bizarre thing is that we have economy of scale advantages that seem to be ignored.

 

[KCFlyer]

Flyhigh - how come Southwests revenue management department was able to LOWER their highest one way fare, yet INCREASE the average fare paid? Are not all costs considered in the CSM calculation? If they are, and it costs UAL 11 cents per mile and they charge a fare that translates into 9 cents per mile, how in the world does this help them at all? It puts a butt in a seat at a loss - thats all. And to "manage" the revenue, they'll try to offset that by charging someone else a dollar a mile for his ticket. The revenue managment model that the "major" airlines are using is broken. Time to fix it, and there's no better time than now.

Casual rat - let your competitor have those money losing fares. They'll still have to try to cover their losses...if you LOWER you highest fares, they have no choice but to match it, lest they lose the one passenger you all want - the last minute, full fare buseiness traveller. That means that if they keep up the money losing fare sale, it will be much harder for them to make it up. If they want to run loss leader fare sales, let them run themselves out of business. You can force them to drop the loss leader fare. You cannot make money with "volume, volume, volume" if you are losing money on all the volume.

 

[flyhigh]

WN was able to increase avg fare by improvng mix (more people buying the higher fares than in previous periods). Also, keep in mind that WN only lowered their fare in a relatively (to their total amount of priced mkts) small number of their mkts. In reality, most of their high Y fares were already at or below the $299 level. The press release was in effect stating something that alread happens. Good move on their part. I'm a fan of a simplified fare structure...it think it's easier to manage and thus generates better revenue.

How can you say it's broken when everybody (including WN & B6) use that same model. CO & WN have the same software vendor for their system.

The U2 product can work if they get rational costs in the system. The idea of letting a competitor have that pax doesn't work. If you're always perceived as the highest fare, nobody looks at you ever. AA, UA, DL, CO, NW are considered high fare and have to convince people a lot harder than B6, WN, FL that they have low fares as well.

 

[Segue]

UA's 11 cents per mile cost is an average for the whole system. If you adjust if for shorter routes that WN flies, you will find that average cost to serve a route shoot up dramatically to something like 15-18 cents. To put it in perspective, its like highway MPG vs. city MPG. Its like comparing an SUV (UA) to a Honda Civic (WN). The SUV's highway mileage is already worse than the Civic's city mileage!

The management of a network carriers revenue on an O&D basis is an extremely complex undertaking. Managing in a point to point environment is simple in comparison.

In the boom times when the demand for travel dramtically exceeded the airlines capacity to serve it, UA was able charge vary high fares to the business traveler, and at the same time keep to low cost carriers at bay by matching them in selected markets. A number of factors caused the very high yield fares to dissapear - economic situation, transparancy of fares on the internet, and the plane fact that the public got sick of being gouged.

With UA's cost structure, they can match a low cost carrier's fare on a tactical (short term, marginal cost) basis, but cannot sustain it on a strategic (long term, fully allocated) basis unless they can fully match a low cost carrier's costs. Thats what "Starfish" was all about.

UA cannot match the flat fare structure of low cost carrier unless it gets the cost side in order first.