jeedk

UA hubbing at a place people refuse to acknowledge serves NY metro - 15% margin

DL having largest share at both LGA and JFK plus most on-time systemwide and yanking corporate accounts from UA's JFK exit left and right - 4% margin

i hope that's not someone's definition of "winning"

sinoflyer

As I am late to this discussion, here are some rambling thoughts:

Sumers, the author of OP article, is L.A.-based. The article reads more L.A. (and S.F.) -centric in the sense that Kirby seems to suggest that JFK's impact to UA's network has affected LAX/SFO more negatively than NYC. The article isn't really about the customer base in Chelsea or UWS.

UA EWR's 15% margin vs DL's barely profitable JFK is indeed an eye-opening revelation. However, I interpret Kirby's statement to conceal the possibility that LAX/SFO's margins have been hurt badly.

Same with UA's market share. UA may have maintained or even increased the number of LAX/SFO-NYC seats after shifting p.s. to EWR, but has UA actually lost local market share (i.e., not counting pax who connect onward at either end)? I don't have access to traffic numbers right now, but Kirby seems to be saying that.

Disagree. Pruning an airline's network is as good as fait-accompli, and it's difficult to reintroduce. I'm thinking up an analogy on the fly, so this might not be the best, but suppose someone decided to take out all the chocolate chips from the cookie dough. Then, after baking has started (i.e., after some time has elapsed), they changed their mind. It makes no practical sense at that point to put the chocolate chips back in. Even if they try, the cookies likely turn out uneven. Blah.

CO_Nonrev_elite

Like many of the others have said, it really depends on where you are coming from or going to as well as, and it's important what you are used to. For me, I am usually headed in/out of Soho or East Village, and I would take EWR every single time without blinking an eye. Getting to JFK takes forever, and from my personal experiences, is almost always a hassle. LGA is fine, but it has limited destinations.

Secondly, as a United flyer (previously CO), I know EWR well, and my options on this airline are far greater out of EWR than JFK. This was also the case pre the change.

sbm12

But not since 2006, so very, very unlikely what Kirby was talking about.

UA bailed on the international routes from a non-hub operation after bankruptcy in the mid-2000s. Continental was hubbed at Newark, United was nowhere close to that at JFK. Drawing parallels there is incredibly disconnected from reality.

I'm sure every airline considers that the critical factor in planning operations.

spin88

Well Your idea of "winning" - doing everything you can to keep up margins in the areas you are profitable, and looking at each piece in isolation - is exactly what United did. The problem, the basic point that Kirby is making in these comments, and similar comments on the 1Q 2017 call, is that decisions made in isolation caused major impacts on revenue elsewhere.

in 2011, the last year before Smisik started applying his "running United like a business" plan United had 37.1B in operating revenue, $845M in net income, it flew 252B ASM, and had a PRASM of 12.87 c/mi.

in 2016 UA had 36.5B in opperating revenue $3.819B net income (much of which was due to lower fuel prices), 253B ASM, and a 12.4 c/mi PRASM.

In 2011 Delta had 35.1B in opp. revenue, made $769B in net income, flew 234B ASM, and had a PRASM of 12.89 c/mi.

In 2016 Delta had 39.6B in opperating revenue, and had net income of $6.636B, flying 251B ASM at 13.41 c/mi.

focusing on the entire company, not individual parts and cost items, Delta (a) grew, (b) grew is PRASM, and went from having 91% of UAL's profit to having 174% of UAL's profit. Why did this happen. Well cuts like JFK was a lot of it.

anc-ord772

This thread is turning into a JFK v EWR conversation. HOWEVER, I'd just like to point out Kirby's comments were about lucrative WEST COAST customers. It seems as though us LAX/SFO folks don't want to fly to EWR (so says Kirby, but what does he know ), although perhaps through it is fine.

Going back to JFK won't magically make the customers reappear, so UNITED will continue to try and enhance the EWR hub. They've left themselves without options here, so what else can they do but double down on EWR.

All this talk about NYC based customers is frankly off topic.

channa

Except that it's not a revelation. It's inside information that DL has and Kirby doesn't.

McDonald's can tell me that Burger King loses money every time it cooks up a Whopper. I wouldn't believe it, and neither should you.

ethan76

All the NYCer I know have the same feeling about EWR/JFK v LGA. The whole EWR v JFK debate always struck me a silly.

Such an interesting comment;how the POV of management changed the lenses that they view the market with. Continental from the position as an incumbent carrier in the NYC had long prior axed its JFK as it provided little value to it's other hubs. Which was not the case with UA's LAX operation.

Well former JV management had build EWR from the ground up, so little reason to retool it, less so given how well it was working.

EWR having combined domestic and intl hubs will always have a leg up on the guys trying to run dual operations split over LGA and JFK, but that is an issue that isn't getting fixed in our lifetimes.

EWR764

Delta publicly claimed its New York operation reached profitability in or around 2014, certainly as a result, at least in part, of business United shed. Given the long timelines for investment in hub building to bear fruit (and really achieving critical mass in the market by way of the US slot swap) I don't think it's unreasonable that DL would be at a 4% margin today versus roughly breakeven three years ago. That would be a pretty impressive result.

spin88

I agree it is good to keep the focus on network impacts as your (and Kirby's) comments suggest. sUA had little local market ex-JFK, it was mostly West Coast people or people who lived both in NYC and on the West Coast. Many of those people, and specifically the valuable corporate accounts, did not migrate to EWR. The net result was that EWR looked a little better short term (some traffic did move), costs fell (making the overall results look better short term), but then United suffered system wide revenue loss as over time as many of the old PS users ex-SFO/LAX moved to OALs not just on this route, but on ALL routes.

What Kirby was saying in the quoted statements is what he said on the 1Q call:

[as an example] let's just take Newark because I talk about it a lot. We have a Newark-based global services or 1K customer, and we started flying the regional jet to Atlanta and regional jets to Dulles and regional jets to Detroit. We pushed that global services customer, who is a high-yield customer, who booked at the last minute to fly on Delta and American in those markets. And beyond that, that customer used to just be a Newark-based customer that was on American -- or United Airlines frequent flyer program and flew exclusively on United. But now, all of a sudden, anywhere they flew, they decided to go shop because we forced them to carry free frequent flyer cards in their wallet, and because of that, they're no longer global services because they didn't fly on United all the time. We lost those customers. So it's not about pricing power. It's about winning back the loyalty and giving a better product to our best customers so that they choose and want to fly United Airlines. And so -- go ahead.
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I was just going to say restoring is not about gaining pricing power or anything like that. It's about creating the best product for our customers in those markets so that they'd want to choose to fly United exclusively.
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Well, look, we used the term -- I try to avoid actually market share and try to say natural share more often than market share because this is not a play to go get market share. This is really about restoring United to its natural share. And United get a lot -- took a lot of accidents in the past 3 to 4 years, which caused it to lose its natural share and which hurt its financials. And you guys used to get on this earnings call and beat them up about why aren't your financials good. And you gave them a cure for that, which was cut capacity, cut capacity, cut capacity and it just made the problem worse. And despite taking the same medicine quarter-after-quarter as the numbers got worse and worse and worse that was part of the problem when the airline was cutting capacity and taking regional jets out of places that set the network like Rochester, Minnesota and redeploying them in places like Newark to Atlanta, in order to keep capacity low. That was driving margins lower. And so I'm trying to be careful to say what we're doing is restoring United to its natural market share, to a position it was in the past, and it's working so far.
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This is not trying to go invade someone's hub. This is about restoring United to where it should've been. And we had some unforced errors. And we were double faulting and giving points to the competitors, and we've stopped double faulting and that, I think, is just going to be getting us back to our natural market share.

What Kirby did not say - but is implied - is that when United's best passengers got on AA or DL they had a better experience. Staff was nice, they were (on DL at least) OT, and the experience was better product wise. Giving up JFK gave OALs a shot at some of UA's best customers, and they stole them.

sbm12

Because UA couldn't get its head out of its arse for a sufficiently long duration to run a reliable operation.

spin88

I tend to agree, and I don't think Kirby is just pulling DL's margin out of thin air. United can figure it out (or should be able to) within a point or two.

But I would also say that Kirby likely does not view that 14% margin ex-EWR as a sustainable thing long term. That is the result of not competing on price, which keeps margins up by gouging UA's captive traffic at EWR, and not having much connecting traffic. Kirby was very direct on the 1Q 2017 call about United needing not to ceed more "natural share" ex-EWR, the need to compete on price more, and the need to run more connecting traffic over EWR. Both of these will in total improve profitablity system wide, but would result in a smaller margin ex-EWR.

To give an example, United can run $3B in traffic over EWR in a year at 14% margin, or run $4B at 13%. No doubt Kirby wants the second, not the first.

I could be snide and say that as dear leader said "OT above 80% has diminishing returns" .

But I digress, clearly bad OT played a roll. However, other airlines (see AA 2012-2014) attracted more traffic and increased relative PRASM when running rather crappy operations.

I think bad Opperations, combined with restrictive and unhelpful IRROPS handeling, loss of special handeling for elites, decreases in product quality, cuts to the FFP, and downgages to RJs and loss of important routes all played a roll.

Bottom line, United became a clearly subpar experience, and the results are very clear at this point. While it is impacted by the Dao events the recent PPP poll (http://www.publicpolicypolling.com/p...onal_42017.pdf ) was eye opening

-In 2013 United had a +20 net favorability rating (33/13). It's dropped a net 44 points to -24 at 23/47 as of today.

- When we asked who people thought the worst airline in the country was in 2013 UA was closely bunched with American getting 10%, Delta 9%, United 8%, and Southwest 6%. Today, United 'wins' by a wide margin with 40% saying it's the worst airline to 10% for
American, 8% for Southwest, and 6% for Delta.

- Currently 35% say SWA is the best airline, 20% for Delta, 14% for American, and just 4% for United.

- 58% of voters seeing SWA positively, 9% have a negative opinion.

- Delta has seen an improvement in its image since 2013- it went from a +22
favorability at 35/13 to a +31 one at 45/14.

- AA' gone in the wrong direction- it was at +21 (36/15) in 2013 and has dropped now to +4 at 31/27.

Darlox

Kirby was saying this in relation to EWR, but honestly, it applies systemwide. What Smisek & Co were doing was chasing margin. They spun the knobs and ran the airline by its P&L sheet, hoping that margin equals growth.

It's also probably worth mentioning that Smiskek seemed to use the words "losing money" in the same way that government often does... Meaning not that they're actually losing hard-cash, but that they're making less money at some activity than they believed they could make elsewhere. Many times the words "money losing" were thrown around during the merger, it very much seemed like a contradiction with historical statements, and disconnected from observable realities. And now Kirby seems to be calling him out on that, where UA actually lost money in the quest for "saving money".

I don't know about you, but I'd rather make 4% on $1M, than 15% on $100k. Margin isn't always what it seems, if the opportunity cost of that margin results in a net-loss. I can't think of many companies that have survived in a competitive market solely by chasing margin, in lieu of an actual growth strategy. That certainly seems to be what's happened to UA, if you're going to talk about "natural shares", in a context where DL out-grew UA's revenue to the tune of more than $3B, over the same period!!

sinoflyer

DL JFK's profitability could also be attributable to the general rosier environment of the industry post-consolidation. But 4% margin is hardly impressive. In any downturn, it's the first to turn back to red. DL's weakness at JFK, even after all the hype and hubbub, is what was eye-opening for me. It further supports that UA had a good reason to stay at JFK even if ops were marginal at best.

fly18725

To be fair, the owners of the company wanted margins over growth. Until very recently, United was not structurally positioned for profitable growth: it didn't have enough of the right airplanes on order and it's labor agreements did not enable cost-effective growth.

The addition of E-175s, used A319s, and lower CASM widebody aircraft, combined with unified labor agreements, allows United to better compete for market share. Yes, there is a different management perspective, but these type of strategic adjustments are much, much more complicated than a decision made in the C-suite.