entropy

Oh, and I'm looking forward to what he has to say about CLE

All the evidence I've seen is that CLE was the victim of the regional pilot shortage rather than being unprofitable.

minnyfly

Not at all. The logic is for either static or dynamic situations. We can isolate the capital cost variables that have changed with time. Let's run through the big ones:

1) Airplanes and flight crew - no change from before, still available.

2) Ground crew and equipment - little change. Some extra up-front cost to restart and an unknown level of service performance difference, but the main long-run variable cost hasn't significantly changed.

3) Terminal - T7 is still there. Might even be at a discount now. Would need to restock equipment and maybe freshen up the UC, but all that stuff wears out and is necessary to replace over time. If they decided to change terminals, well, that's also a decision that would have to visited whether they left or not. So either way it's a cost that would have to be absorbed whether you left or stayed. No significant change in cost as before.

4) Lost slots - let's assume a fair value deal was made with DL in 2015. It's unknown how much more or less JFK slots cost since 2015. For some data points, UA initially "sold" 24 JFK slot-pairs to DL for $14 million for the equal amount and price for EWR slots. After the deal was rejected, it UA ended up selling 30 pairs for the same price. It cost AA $44 million back in 2014 to acquire 24 JFK slot-pairs from B6 in 2014. If the same price exists today, you would buy them back to offset the "wrong decision". The value you got in return last time is a sunk cost, so that doesn't come into play.

5) The unknown lost revenue (we'll call it a "loss") in the short-run. In the long-run this isn't a factor since demand is dynamic, and the changes in your airline and competitors will move demand from airline to airline. If UA was the best airline for Disney and the others because of JFK, you can get them back in the long-run. In fact if you run a good airline in the long-run you can increase this amount and make the cost/benefit ratio of returning to JFK to turn more positive.

So that's pretty much it for direct costs to return to JFK assuming no net growth of the airline (a direct EWR-->JFK swap). Assuming that every statement and implication by Kirby was true and known, and that UA doesn't return JFK in the foreseeable future as Kirby implied (because it's now the "right move" to stay away), we can calculate how marginal JFK was to the network. We can estimate the long-term maximum "network gain" JFK contributed is equal or less than the cost of acquiring and moving crew and equipment back to JFK and for any potential increases in the cost of acquiring necessary landing slots. In other words, the long-term loss of leaving JFK is a few million at worst. At best, there is no loss and leaving JFK was a net network positive.

If Kirby is thinking economically, he would come to a similar conclusion. I highly question he's looking at it that way. Kirby's educational background and track record at US and AA speak to an operations guy that looks at a spreadsheet for his long-term strategy.

The "he knows best" argument is rubbish. It assumes that someone in position of authority on the matter always speaks the truth and is always right. We know that to be complete hogwash in reality.


That's an important point. He could be kinda saying "we're sorry" to those that need to hear it while thinking in this mind "we're really not". Executives speak to their audience. They tell them what they want to hear, truth or not.

Do you really believe that the loss of <200 daily J seat passengers is "badly" hurting SFO? SFO-JFK was a drop in the bucket for the overall SFO situation. Even if every seat taken before was lost and nothing was gained from EWR, those <200 passengers have to be flying far more than just JFK to make a dent in the equation. They have to flying SFO-XXX heavily for a high price.

I don't agree with that analogy. That assumes a fixed amount of product at a fixed point in time for maturation and selling. Airlines aren't like that. I think a better example would be dropping a line of unique cookies to make another line of cookies better and cheaper, selling the factory line that made the old ones, losing business beyond that cookie, and then thinking about bringing it all back after seeing it was a mistake. In the short-run the returning cookie might not be profitable, but in the long-run you expect to get it all back and then some.

Why did this happen? Market power at fortress hubs and connecting points. Far easier and quicker way to increase revenue than "stealing it" from another.

DL's statement of profitably came when oil starting to fall in the latter half of 2014. Attributing any significant amount of that to UA, now again the leading carrier by passengers, instead of the drop in oil, or the VS JV, or the slow maturation of their own market is quite the reach.

Ha, hardly the reason. And if you think Kirby is a "premium product" guy, you're mistaken. He's only shown the opposite and US and AA.

Did you even seen AA's revenue in 2014-2016 when Kirby was in charge? AA's revenue tanked when they went in the fare ware/market share mode. Wouldn't surprise me if that's a big reason he was moved out.

And that's exactly what the airlines like DL, AA, and UA have done. It works best when you have market power, like at DL and AA/US.

There's a huge difference between losing a couple points of plurality market share while significantly growing (due to minorities growing even faster) than it is to lose dominant market share due to shrinkage.

halls120

The employees didn't like Smisek - what did the pilots call him, FLIBS? The customers didn't like him. He presided over a merger that made UA's operations an awful mess, a merger that will be taught in B schools for years on how to not do it.

Seems like the only people who liked him were the analysts who fawned all over him. Why wouldn't most people respond to Kirby's comments with glee?

channa

If you read the article, he said the customer who bought JFK also bought other tickets, and since they lost that customer on JFK, that customer shopped around on other trips as well.

Your mindset of looking at the flight in isolation is what got them in this mess in the first place.

fly18725

I think the hate and disdain expressed for Smisek on FlyerTalk are a product of the community and not universally shared by the rest of the world. Yes, the employee's initial tolerance of Smisek faded over time. I think most other customers were generally indifferent. The finance community and investors certainly lost patience towards the end, but there was never the same type of vile sentiments that people feel comfortable sharing on any anonymous message board.

It is universally accepted that Smisek made mistakes. Perhaps closing JFK was one of them. Kirby also comes to United with mistakes in his past: he is human after all.

I would point out that the "be everything to everyone" strategy has gotten plenty of airlines into trouble, and bankruptcy, in the past. Determining what loss-making flights are required to maintain the network is not a straightforward decisions.

elitetraveler

Operating at JFK is hardly a "be everything to everyone" strategy. It's one of the world's busiest and most important airports with a huge base of premium travelers.

halls120

"universally" accepted? I don't think so. there are many examples here on FT starting from the time he was fired up to today of people defending him to the bitter end.

I have no idea whether shutting down UA at JFK was or was not the right idea. Smisek thought it was, and how did that turn out?

Pi7473000

I am not surprised at all! PMCO management that controlled much of the new United had little knowledge of the importance of premium service and the importance of service to JFK for people from LAX and SFO. The new service to EWR is very 1990s and there is not even an option for F class to EWR now only CO outdated business class. PS by United was amazing to JFK and I loved having 3 class service and all economy plus in coach. EWR is outdated and the staff their is not nearly as service oriented as the staff I dealt with at JFK. It is too bad United Airlines left JFK based on PMCO poor management.

fly18725

How much do you spend to maintain a token presence at one of the world's busiest and most important airports? Also, why isn't United flying to DXB?

I am not aware of anyone unequivocally defending Smisek. Supporting one or several decisions is not the same as defending the person.

I don't think we've seen proof that leaving JFK was a bad decision. Kirby's comments about corporate contracts leaving is concerning but doesn't quite add up as Time Warner was never an exclusive United customer. Disney was primarily United, but also not exclusive.

elitetraveler

JFK has a huge O&D base and a high percentage of premium travelers and is located in one of UA's most important markets for O&D traffic.

DXB has a high percentage of connecting traffic and a large percentage of VFR and other leisure traffic. For UA, it's a distant spoke.

channa

I agree, it's not straightforward, but this one was a no brainer.

JFK-LAX are the two biggest markets in the United States.
JFK-SFO is also quite substantial

There's simply no excuse for it.

Your argument is like Safeway or Kroger saying they don't make enough money on milk or bananas, and they're going to allocate that space to a higher margin product, without realizing that by not selling these things, they will lose carts full of business, $200 at a time.

Or Walgreens saying toothpaste really isn't good margin, so let's not sell it, and not recognizing that not having the basics will result in lucrative prescriptions being filled elsewhere.

fly18725

Yeah, Southwest runs a pretty shoddy and poorly stocked store.

And be that superstore operated by United across town is totally irrelevant.

elitetraveler

Since Kirby said UA lost key customers because of it and in hindsight leaving JFK was wrong, it shows that your argument is wrong. UA management is saying they've looked at the numbers, and shouldn't have done it. Not sure why you are defending the decision?

truncated

From Kirby himself:
In the context of the ex-LAX market — yes EWR (Walmart?) is irrelevant.

fly18725

Hey, this community is dedicated to skeptically ripping apart the smallest statement from airline management. I'm not saying Kirby is totally wrong, but some of what he is saying doesn't quite add up.

Clearly, the best way to win over the FlyerTalk crowd would be to start PMUA 757 service JFK-BKK.