Why United Airlines will fail again (By Joe Brancatelli)

[eolesen]

McKinsey is quite huge, and each practice operates somewhat independently. You can have people working with Airline XX in one practice, and Airline YY in another, and they'd never know about the other group being engaged with a competitor.

And that's exactly the way it's supposed to work -- otherwise, nobody in their right mind would ever hire them again, lest inside information be shared or unwittingly recycled by a competitor.

 

[RowUnderDCA]

Yes... actually that crossed my mind: that young McKinsey associates are told don't talk about work when your tipsy to random people you meet in Washington. Pretty good advice all the way round.

 

[Flying Titan]

What an idiot. He's blaming oil prices for his failures to fix what's wrong?

News for you, Tilton: Brand new Boeings cost 50 to 100 times more money today than 707s did in 1958. How on earth can any airline hope to be profitable when airplanes are so darned expensive?

Although they have been slashed over the past four years, airline employee wages are much higher today than in 1958 as well.

Sure, fuel is up, but nowhere near as much as airplanes and wages.

Not quite sure of the rationale behind comparing fuel to 1958 pricing. Wouldn't it be more apt to compare fuel to say 2000 pricing....or even 2003 pricing??? I think any executive who would have said, ten years ago, when the airlines were raking in the cash, "We should plan on $100/barrel oil because that's what the inflation chart says it should be from 1958," would have been run out of the board room like some loser on the Trump show - and rightly so!

Of course the sudden, steep increase in fuel prices makes a difference and that's the one thing in this industry that's hard to blame on the airline CEOs.

 

[hp_fa]

CNN Money is not impressed.

 

[Deleted by Moderator]

Very sad to see a company like CNN not be able to even understand that United is breakeven at $67 and long term is $50. Good news doesn't sell papers. Analysts have been predicting United's failure for years now.

 

[JetClipper]

Very sad to see a company like CNN not be able to even understand that United is breakeven at $67 and long term is $50. Good news doesn't sell papers. Analysts have been predicting United's failure for years now.

Not to sound like I'm attacking you, but where did the "breakeven at $67" figure come from?

 

[FWAAA]

Although I don't agree with Joe Brancatelli (I don't think he's actually very perceptive), I do think that UAL will have a very difficult uphill battle ahead of it. Why?

UAL spent over three years in BK and cut wages and other expenses about $3.5 billion each year with a vague promise to cut annual expenses by about $7 billion by year 2010 or so. But Tilton and the others failed to cut expenses or raise revenue sufficient to produce positive results. Yep, expenses were slashed. But not far enough to produce net income in the final quarter of BK. That's a failure. One that may result in another Ch 11 within a year or so. And ya have to wonder: From where does the DIP funding come for that trip?

 

[767jetz]

Not to sound like I'm attacking you, but where did the "breakeven at $67" figure come from?

From here.

"United says the $50-a-barrel mark is a long-term estimate and that the company can break even at current prices by raising fares and extracting more revenue from premium services. "

 

[mrman]

From here.

"United says the $50-a-barrel mark is a long-term estimate and that the company can break even at current prices by raising fares and extracting more revenue from premium services. "

Yep, the opposite strategy of every successful airline out there.

 

[Retired1]

Yep, the opposite strategy of every successful airline out there.

Looks like everyone could let UA have a day or two in the sun before all the negative stuff.

 

[Cosmo]

Yep, the opposite strategy of every successful airline out there.

You mean like unsuccessful, money-losing airlines like BA, AF/KL, LH, IB, CX, SQ, QF, NZ and even (albeit only recently) AC?

Just to put things in proper perspective (using 4th quarter 2005 numbers from press releases):

United
Operating Revenues: $4,386,000,000
Operating Loss: $182,000,000
Operating Margin: -4.2%

JetBlue
Operating Revenues: $446,000,000
Operating Loss: $42,400,000
Operating Margin: -9.5%

All in all, with a negative operating margin that is substantially smaller than JetBlue's, United is not doing too badly. And with JetBlue's quarterly loss (a new experience for them) and the price of oil remaining high, don't you think that even they will have to raise their fares to some extent to return to profitability?

 

[767jetz]

Yep, the opposite strategy of every successful airline out there.

Name one airline whose business plan makes a profit at current fuel prices? Or even breaks even for that matter.

And leave SWA out of it. They do not pay current prices for fuel. If they did, they would have huge losses today. Their hedges will run out eventually. As that happens they too will either lose money or raise prices. So their current business model does not work under CURRENT fuel prices either.

I'd say breaking even is pretty darn good compared to the rest of the airlines out there. Which puts UA ahead of the pack.

 

[WNrforlife]

Your memory is sound - the ridiculous powerpoint presentation (widely distributed on the internet) was indeed created by McKinsey.

Uh-oh. McKinsey is working for us too. What's up with that?

 

[WorldTraveler]

United is not committed to being profitable. It simply is willing to be competitive w/ the rest of the industry - which at present is still losing money.

"As we move ahead, United is committed to continuous improvement in costs, revenue and operations to optimize our resources and sustain competitive margins. We have achieved a great deal in our restructuring to reposition this company and build upon our assets, an unrivaled global network and our dedicated employees. We can be better. We are in a very competitive industry, and we take nothing for granted."

To make the next few years even more difficult, UA has little ability to generate add'l revenue because its fleet is already stretched to the max. Sure a few int'l planes could be had now but for lots of money and it still takes at least 18 months to build a new widebody aircraft. Further, the low fare carriers are gunning at UA's high fares in DEN, IAD, and SFO; they couldn't have been happier to hear that UA was out of bankruptcy because now UA has to put for every bill on time, just like the the low fare carriers do.

While JetBlue's performance is probably worse than any other airline for this quarter (DL would have to lose about $400 million dollars operationally to match that and their monthly reports don't come close), B6 still has the ability to issue public securities and has a pretty good credit rating. Like any airline, if B6 doesn't turn it around quickly they will be no better off than the legacies but they have a LONG way to slide and alot of money and options to go through before they are in a similar position to the legacies. Doesn't mean it can't happen but it's pretty doubtful. It is noteworthy that B6 mgmt is now saying they have too match capacity from the NE to Florida and need prices to go up - and yet they are receiving how many new airplanes this year?

 

[whlinder]

Neeleman was quoted recently (in the NYT IIRC) saying how oil should be in the 40s and he expects it to go there. I don't know where the price of oil is going, but I do know that UA catches a lot of flak for the supposed $50 long term average, yet I haven't read a single negative comment about B6 'basing oil' in the 40s...