What happened in the 1980s? Prior to deregulation in 1979, United was in a dominant position due to Patterson and co.'s guidance (example: the Capitol merger was one of the few successful airline mergers in history). After 1979, the airlines were forced to reinvent themselves. We all know this.

AA adapted particularly well, despite suffering the requisite losses everyone else did at one point or another. Crandall saw a vision for AA as a lean, mean network carrier. He knew growth was crucial to dominating the new market, and so he instituted "B" wage scales to fund a massive acquisition of domestic aircraft (MD-80s). With new airplanes coming in at a dizzying rate, AA was able to infiltrate and destroy markets with vulnerable carriers. We can't underestimate the effect of AA's other business innovations too, like AAdvantage, the CRS, and YM.

Example: AA had been large in DFW, significant in ORD, and small in MIA. In the 1980s, it outcompeted BN in DFW, likewise gained ground on UA in ORD, and moved in to acquire EA's proven Latin American system.

What did UA do? Left with management that wasn't as dynamic as Crandall's regime, it mostly followed, and followed pretty well as one would expect the largest air carrier too. With a "me-too" attitude, United created Apollo, Mileage+, and studied/executed Yield Management. Whereas AA had been growing from a massive expansion, UA had been growing as a natural result of its market position.

But in the mid 1980s, AA (as well as DL, and to a lesser extent NW) was quickly gaining on national market share. Not until Ferris came did UAL have a CEO with the bright-eyed potential of Crandall. Ferris was one of the youngest airline CEOs ever, and he quickly made an aggressive, strategic move by acquiring PA's pacific network for a steal in 1986. That purchase alone had ben a large stimulant of United' growth until today.

He also tried to innovate. The first to conjure up a scheme to have a "travel network" (Allegis) with an airline, car rental agency, and hotel synergy, Ferris impressed many investors, customers, and competitors. However, to fund this massive effort, he would have to get concessions, much like Crandall's "B" scales.

The First Problem

Crandall had been able to accomplish his B scales only because they were completely new. Frankly put, AA's employees didn't see how much they would be screwed. Eventually, distaste for B scales infiltrated every other airline's union.

When Ferris proposed B scales, all the relationships he had with the employee groups crumbled. This was when the cooperative mentality at United first fractured. One unusually self-righteous pilot, Rick Dubinsky, took the proposal to the extreme, leading to the disastrous 1987 pilot's strike that led to massive losses and established unharmonious labor relations.

If Ferris had been able to conceive of a different way to fund Allegis than B scales, it could have succeeded. At the very least, he should have shelved Allegis for the sake of maintaining a civil culture within the company.

The First Problem's Effects

The lost business, compounded with economic slowing in the late 80s, made United lose droves of money and customers. AA gained so much from UAL's mistake, it was estimated AA "stole" something like 5% of UA's market share at ORD immediately after that strike.

More dangerously, it established a tense border between unions and management. In large part due to Dubinsky's stubborness, the employees acquired a new vigilance.

The Second Problem

Dramatic expansion under Wolf proved to be a win/lose situation. While UA acquired strong international coverage and placed orders for many new aircraft, these large cash outlays and expenditures led to massive losses. When the recession of the early 90s contributed to the possilbity of financial failure, Wolf turned once again to concessions from labor groups.

Because of the bad blood from that previous round of negotiations, labor became more militant. Drastic proposals were made to solve the pressing cost problem, eventually leading to the ESOP.

Settling for the ESOP under the circumstances it was accepted was the second problem. An ESOP was a good idea, but not under the conditions it passed.

Employees were given expectations of more representation in management, along with growth of the airline, and expectations for the best during the ESOP either through stock performance, or after ESOP through guaranteed leading wages.

In reality, no effective "employee empowerment" programs were maintained, employee representatives on the board became glorified rubber stamps, and not even all the employees pitched in. The F/A union, a key component to having unity in product, was not included.

Effects of Problem #2

No matter--these fundamental company culture and structure issues would be overlooked. Why? The economy began to boom in the latter 2/3 of the 1990s, and the "lucky" acquisitions of aircraft and international routes made earlier pretty much ran the airline and raked in profits themselves.

Managers saw no pressing need to change the ESOP. Employees worked with the faith that ESOP would work, even if work remained the same and wages were lower. To a large extent, growth of the airline was pretty much guaranteed by its fortunately-gotten assets.... the stock price reflected this growth, so at the moment employees had nothing to complain about.

Management (Greenwald) did not make any deep long-term decisions, other than to establish United as the most savvy alliance dealer and to continually say all was well to the employees.

In reality, UA had been providing a mediocre product all this time, just because it could. Its ingenious hub structure, coupled with strong international markets, kept people flying UA.

There really wasn't much incentive to practice aggressive yield management: even though UA maintained less than-fortress control of its hubs (unlike other carriers), its catchment of business travel, due to its geographical position in the economic upswing, made the financial wheels run seemingly smoothly.

United did eventually recognize that it came to rely on a disprportionate amount of business travelers (see the 'Rising' campaign), but unfortunately made a horrible PR move to alienate everyone else at the expense of "showering the elites with love". (UA has horrible PR, and that's a smaller issue).

Problem #3

This last problem represents the compouding of the first problem (culture change) with the second problem (inefficient ESOP plan) and the developments of a stalling economy.

UA management had not done many things proactively by the time notorious Goodwin joined the gang. They still felt all was well, even if competitors had outfoxed United in innovating. Other majors had found an efficient way of increasing market share by gobbling up regional carriers and deploying regional jets, something United was very slow at catching on to, and is still lagging significantly behind.

As the economy slowed from late 1999 onward, United entered a weaker market with horrible timing. ESOP was about to expire, and the employees had been waiting for what was promised to them: either a new ESOP, or guaranteed leading wage rates to be expected from a "such a successful airline".

United, its managers realized too late, was not in a position to offer the latter. The employees, however, had seen how much the airline had prospered under ESOP and were eager for a piece of the pie. They didn't want another ESOP.

Because only now did managment start to see long-term effects of the ESOP snapbacks, it started to hesitate. It myopically ventured into no man's land by being blatantly uncooperative with labor negotiations.

The most recent problem: What's the core business???

Goodwin and co. early on realized United could not maintain the status quo just by sitting idle. As other airlines became more competitive, United had to start offering a better product. Enter things like First Suite, and Economy Plus. Most significantly, it tried to acquire US Airways to start growth again.

In the meantime, the employees became angry that the airline was holding out on increased wages, and yet making all these expensive decisions.

Management, while now finally focusing on the long term, failed to seem the long term ramifications of this short term issue.

Militance from the unions seen only twice before during the 1987 strike and 1994 ouster of Wolf emerged again... We all know how the Summer from Hell went.

What was United's solution to all the lost business from SOH 2000? It's highest profile moves were continuing on with the US Airways merger, followed by going into business jets.

When it was clear to the public and employees alike that United didn't know how to run its own airline (mainly because of employee dissatisfaction), the airline took on a reputation of "callous dominator". It became the poster child of airline criticism, and suffered even more lost business from this bad publicity.

Now, United is left with a dramatically reduced operation. We all know this year's story...

CONCLUSION

United's current problems all boil down to a botched management-union transaction that changed employeee expectations forever. When United turned to ESOP to fix its culture problem, it didn't select the best solution. So, while the airline grew from its valuable acquired assets, it didn't see how much the problems were brewing. Nearly 20 years of blindness...

How can United ensure its long-term survival?

These main goals are obvious:

1) RESTORE EMPLOYEE CONFIDENCE

Creighton is doing exactly this. Establish rapport and trust again between management and unions, and negotiate fair contracts. Don't exlude any details in showing employees their role in the company vision: how the company will grow again.

Make it clear the operational goal is for CONSISTENCY. With better reliability, there will be less service disruptions, employees' jobs will be less stressful and hectic than when having to deal with late flights.

2) RESTORE CONSUMER CONFIDENCE

Keep make reliability a number one priority, as United has been doing recently. Consolidate market positions. This means beefing up dominance at key hubs, perhaps at the expense of the expansionary hubs (LAX, IAD). Ensure product consistency by setting service standards for UEX now that more and more markets are serviced with these affiliates. Buy/invest in these partners if necessary (and bring RJs!)

Make it clear the operational goal is for CONSISTENCY. With better reliability, there will be less passengers complaining, and more being satisfied and gettin on their merry way. Prove to passengers this commitment.

3) RESTORE INVESTOR CONFIDENCE

Simplify cost structure. Reduce debt obligations. This is what Creighton is doing right now. Avolar is actuall making an initial good show; hopefully it will be enough to attract an outside majority investor so that United won't have to pour in additional funds.

Make it clear the operational goal is for CONSISTENCY. Investors like to see a company that is well run, has high productivity, and continuously streamlines operations.

4) INNOVATE, or CATCH UP!!!

Recognize market opportunities, and capitalize on them. For example:
[list][*]While UA has shrunk in the west, it should capitalize on retrenchments in the east (US Airways markets), where the economy is more stable than the technology/import-export focused west coast. This means making aggressive bids for any assets that might come into play (US Shuttle).[*]Large RJs. Look into them. The ERJ-170 shows amazing prospect for formerly packed domestic routes... Be the first US major airline operator. [*]Make United Business excellent. This has to be something completely new. Perhaps promote the whole experience (ie access to Arrivals lounges, etc.) Delight the high-yielders. [*]Increase yields by becoming more attractive to elite flyers. Compensate for less-convenient schedules by offering larger F class cabins. Doesn't hurt to reduce coach capacity in the short term... Economy Plus is a good thing.[*]Increase yields by attracting normal passengers as well. Do the opposite of alienating "the commoners", make them ALL feel appreciated. Reputation goes a long way. [*]More stable leisure traffic. Start serving high-demand leisure destinations (ex: Cancun) to diversify operations and reduce risk of system shocks on traffic.

5) RECOGNIZE & PROMOTE POTENTIAL

United should actively inform employees, customers, and investors of the assets it has, and how it will continually strive to use those assets as efficiently as possible.

The key to running a successful airline is to first please employees, who will in turn please customers, which will lead to business growth, which investors will flock to.

In summation, problems came about because the airline did not please its employees. There's no reason why this airline shouldn't be successful were it not for the fact that this first step had been ignored in the past...

Having a comprehensive route network, modern and comfortable planes and hub facilities, and an addicting mileage program are not the only components of a good airline. Things in the background, like self-reliant, satisfied employees, and communicative managers, are required. Things at the forefront, like real customer appreciation and flight reliability matter just as much.

If United can achieve these goals, it will be on the flight path to become a truly stable network carrier, offering a solid product.

Agree/disagree? Comments please.

[This message has been edited by imkeww (edited 11-20-2001).]