commavia

Ha, yeah ... "wrecked" AA in the sense that the company is more profitable than it's ever been in its history.

I highly doubt that AA's shareholders have much trouble with the "wrecking" - for better or worse - that has occurred at AA. And with all due respect, I'm sure United's owners would love for some more of that "wrecking" to happen at United, too - thus (I suspect) why the Board of Directors, ostensibly owners' representatives overseeing the firm, hired Kirby in the first place.

fly18725

How was AA "wrecked" in a way that was above and beyond the other changes in the industry?

Changes to domestic upgrades, elites benefits, density of economy seating, etc are taking place at every airline. There are some nuances between them, but I really don't find the product and service offerings particularly different.

There's not much to hide as guidance was provided. I think some strategies and goals are probably being reevaluated, which is not unusual when new management is brought in. I don't think that excuses the poor messaging.

It may have been better if there was no Q&A at all, though that sends a pretty drastic message.

cerealmarketer

The 'ugly girl' brought to the table an incredible fortress connecting hub with low costs in CLT, and a couple decent ones in PHL / PHX without any crosstown competition, along with a lean reliability philosophy.

It was accretive to AA performance simply based on that, and directing more resources to bolster, especially CLT.

UA/CO from the start had a fragile hub hand. Every hub but Denver has crosstown airport capacity that dilutes the market, makes room for competition, and all are relatively high cost vs the CLT, ATLs of the world.

You can have the best product in the world and you'll trail on domestic financial returns with the UA hub hand vs DL/AA.

The bet with UA was Asia and other emerging markets would be so wildly profitable it would offset that, but the Chinese carrier capacity dump put a damper on that.

FCfree

Southwest is just easier to deal with. No bag fees, no change fees. Full value of ticketless travel funds (TTF) when you cancel or change a flight. TTF refund if the price of the flight goes down. Board early (early bird program) for $15. Credit card program where 50,000 points is worth a lot more than 50,000 miles on United.

True, no chance of an upgrade on Southwest, but depending on your status, sometimes very little chance on United. Every flight where you buy coach and sit in coach on United, you could have had the best customer service of Southwest.

If you are a Super 1K flyer, you probably earned it on TATL/TPAC, so sure, use United domestically and catch those upgrades. That makes sense. But if you are mostly a domestic flyer, you have to do a lot of BIS to earn something on United.

United happily pushed me away from them. And, as a result, I have stayed away for the most part.

AAExPlat

I know you know what I mean...Horton was the one that managed AA in BK. He did so by focusing on the flying experience. That strategy achieved that AA shareholders not only did not get wiped out during BK but made money. As just reward, he was then forced out after Doug and Kirby made a deal with the pilot and FA unions to greenlight the merger (which they needed more than AA thanks to upcoming payments on capital investments that they did not have the cash flow for).

When Horton left and Parker took over, the focus on the flying experience quickly disappeared and was replaced with a mentality to cut.

AA has not been doing as well as DL as a result IMO. Not as bad as UA, but not as good as or better than DL. So this myth of Kirby as the savior is highly overplayed.

Case closed then. Kirby is the best manager in the Fortune 500. He walks on water and makes no mistakes. Where he goes, customers and shareholders rejoice. Any issues that have arisen at UA have nothing to do with him. He has only been there a little over a year anyway...at the root of any bad decision (which Kirby doesn't make) is always Smisek. Or Oscar if Smisek is too far fetched. Congratulations. We can all move on now.

EWR764

This is a big part of the story. Setting aside the 'unforced errors' (which Kirby himself acknowledged in his first investor call, yet one year later, contributed to mightily with bungled BE), it is a fact that the UA/CO merger brought together the two most international majors with the weakest domestic franchises, at least as compared to AA/DL/US. NW didn't have the same domestic footprint as the others but brought two fortress hubs with great local pricing power.

In the current business cycle, the growth was largely domestic, and in the years leading up to the merger, both CO and UA actively downgauged and cut back domestic either in favor of international or eliminated the flying entirely. Simply put, neither UA nor CO were prepared to capitalize on the post-consolidation, post-recession domestic environment. United, for instance, dumped 100 737s operating almost exclusively int he domestic network, only partially replacing that capacity with regional, while CO aggressively grew international while reducing domestic gauge in favor of regional.

As a result, from a structural perspective, merged UA missed out a great deal of the revenue growth from 2012 onward due in no small part to domestic underexposure, while international (more heavily influenced by exogenous factors) failed to meet expectations.

The capacity increase now is a belated attempt to capture some of that growth as the domestic market is still comparatively healthy, but the expansion is one major factor which contributes to unit revenue pressure. I think Kirby realizes, in many respects, that United lost about 2-3 years of ground to the rest of the industry, but has burned through so much goodwill that the investor community is hesitant to give management the benefit of the doubt in digging out of the hole.

commavia

I think that's a fairly incomplete narrative of history. I fully agree that Tom Horton deserves immense credit for arguably the most financially successful bankruptcy restructure - at least from the perspective of shareholders - possibly in modern American corporate history. But I don't think it had as much to do with the "flying experience" as implied above.

There is no question that AA's focus on an improved product/service offering during 2012-2013 was critical in the speed of the company's turnaround in bankruptcy. After the 1113 pilot slowdown, with the company's inferior longhaul premium hard product at the time, and given the company's by that point smaller and weaker network, the product/service offering was far more critical for competitive differentiation. And I totally agree that it's a testament to Tom Horton, Virasb Vahidi, Maya Leibman and others that they accurately recognized this at the time. The opportunism in 2012 in aggressively taking advantage of United's disastrous integration was also shrewd.

All that said, the area where Tom Horton truly made the most profound difference in creating value for AMR shareholders was the financial maneuvering and negotiations with the creditors committee, the unions and USAirways. There's no question that AA's attraction and retention of premium passengers was a critical foundation of leverage for these negotiations. But ultimately, the incredible "deal" AA struck - that ended up being so lucrative, on a historic scale, for the bankrupt company's owners - had more to do the massive potential for value creation from the combined entity, and AMR management's successful ability to capture a greater and greater share of that value for its own constituents.

That's one perspective - and I respect it, but I don't fully agree with it.

There are many reasons why AA is not achieving margin parity with Delta - I think service standards have little, if anything, to do with that margin deficit. I think the far more compelling and comprehensive explanation is that AA is half a decade behind Delta in merger integration, and has not yet been able to fully unlock the revenue and cost synergies from the merger - I think more of those synergies are in the rear view mirror than ahead at this point, but there is still a material amount to go. I also think it's arguable that there may be some structural margin advantage Delta will always have because of its level of overall dominance it has at many of its hubs, the flexibility afforded by a near-entirely-non-union workforce, etc.

I think it will be very interesting to see where the three carriers end up in, say, 3-5 years from now, when AA has fully realized all of the merger-related integration and consolidation, and United has (hopefully) sorted out all of its issues. I think all three will be successful companies, and all three have positive futures ahead. But I'm not entirely sure that the relative performance of one versus the other - Delta vs AA, for instance - today is necessarily fully representative of where things will stand in a few years.

I certainly agree that Scott Kirby is no "savior" - wasn't for AA, isn't for United now - but then I don't know who is perpetuating that "myth." If I missed it somewhere earlier in the thread, apologies. Scott Kirby is a demonstrably smart, engaged airline executive - I don't think anyone has seriously suggested otherwise.

minnyfly

Your cause of their uneasiness is related to my cause. Analysts care about two things - PRASM and margins. UA isn't delivering as well in that area compared to other airlines, so they want to hear changes that a spreadsheet will say improves those areas (capacity cuts being the clear #1 ). They didn't get it, and instead received more confirmation that significant capacity increases are on the horizon. For the consumers's sake, hopefully the UA management doesn't cave in. Competitive battles in the skies aren't won on Wall Street.

Think of the scenarios for UA management. Say UA offered new guidance that was remained optimistic but also included large capacity gains. The analysts aren't dumb. They will see right through that facade. Or UA could be dishonest and say capacity cuts are on the table when behind the scenes they're not. That kicks the can down the road and creates a larger problem when discovered. So they went with yet another option, which was "we're in the middle of it". Not surprisingly that didn't work well either, but I fail to see a much better excuse when all along UA management wasn't going to give the answer short-term analysts want. That's the bottom line.

spin88

No offence, but I’m seeing a lot of revisionist history here. While I understand the desire by some not to see fault in the PMCO/wall street analyst approach to running the combined carrier, according to no less than United, they were the leading carrier after their merger. Here is the state of play as of October 2011, which was before Jeff – following the Hunter Keay play book – started his “changes you are going to like” – everything is a QUOTE FROM UA:

Hubs in 4 largest U.S. cities
Serving the most destinations in the U.S
Merger created global network with unsurpassed scope
Serving the right markets, with the right assets, #1 across the pacific, #1 in US/Canada, #2 to Latin America, #2 across the atlantic
United is generating industry leading results
Revenue – Leads network carriers
Pre-tax margin – leads network carriers
Liquidity – leads network carriers
United leads U.S. network carriers in unit revenue and margin [and by “unit revenue” them mean PRASM ;0]
Have captured more than $130M in synergies year-to-date On track to achieve 25% of $1.0 – 1.2B run rate synergies in 2011


And the plan: “Expect 2012 consolidated capacity to be flat Reduce domestic capacity while growing international”

P.s. I did not just make this up �� https://www.sec.gov/Archives/edgar/d...2148dex991.htm

Delta - with the same "fortress hubs" you claim UA lacks, hence their failure to do well - was behind UA+CO in all respects. UA's fortress hubs (IAH, EWR) had much higher revenue premiums in any event. To the extent the hub networks changed, DL made major changes, which involved it expanding/going into highly competitive markets, JFK, SEA, WestCoast, LAX. United in turn pulled back from highly competitive markets like SEA, LAX, JFK. The actual evidence re the networks in 2012 vs. 2017 say that United is not being punished by the market for having inferior hubs.

On the other hand, United make a lot of “changes you will like”, changes that I and others have said with each change cumulatively would drive away traffic:

(1) Going with SHARES (developed for Eastern Airline) so as to save $$$$, with minimal training on the sUA side and no modern interface.
(2) Deciding to merge the FF programs with increase in benefits to sCO elites, loss of benefits to sUA elites, because “we had to draw a line somewhere”
(3) Cutting back CS compensation with a the CO pound sand approach to CS issues
(4) Cutting domestic capacity by retiring old sCO 737s and sUA 757s and converting domestic 763/772s to international planes.
(5) Aggressive cross-fleeting w/o a joint labor agreement
(6) Using sCO 135/145 RJs on long/business flights out of sUA hubs
(7) Using RJs on major business routes
(8) Setting IRROPs rules to make it hard to rebook and restrict off-line rebooking, including for GS (at least in 2012-2013)
(9) Setting a low 80% OT goal as “there are diminishing returns above 80% OT”
(10) Cutting back MM/2MM benefits
(11) Cutting back FF redemption availability and raising the price dramatically, “non-pass”
(12) Cutting back E+ pitch
(13) Putting horrible slime-lines on the A320/A319, not doing anything on F
(14) Pulling out IFE, taking dark planes
(15) Putting last gen, sCO J seats in new/refurbished aircraft
(16) Cutting back on food service/quality in domestic F, and major cuts to PS/J/F food service and quality, also cuts to Y catering
(17) Cutting out all quality booze, including in F/J. United is the “bud, beem, and white label airline”
(18) Setting the wine price points as $5/bottle in domestic F, $12/bottle in J, $15 in F
(19) Freshpoo all around, taking expresso off the sCO birds
(20) Not upgrading the clubs, and when new clubs were done, no showers, and clubs are small.
(21) Not matching OALs in food/drinks in clubs, going with frat party booze
(22) No pillows on domestic F, thin tissue blankets, if you can find them
(23) No widebodies to Hawaii.
(24) No special service to Hawaii
(25) Outsourcing most/all non-hub stations
(26) Not getting labor contracts, waiting for Unions to give in. trying to hire people on the sCO side and attrite the sUA side
(27) BOB in international flights, no mid-flight snack/food.
(28) Selling TOD upgrades at every opportunity

I could go one, this is just the “Smisek/Smith Street Crew” list, feel free to add any that I missed. I'm sure someone can add another 10-12 "enhancements." We know the more recent Kirby/Oscar downgrades, and also the few actual things they did to make the passenger experience better.

Bottom line, United made a lot of decisions – every single one of which – lowered the value proposition of flying United. The result is inferior hard and soft product and CS and a mileage program that is no longer leading, and as to things like upgrades and requiring GPUs be on fares that are $800+ more on all but close in purchase, offers less than other programs do. The only counter value (and why they projected synergies) was a larger network.

United has admitted on a number of occasions that they lost valuable traffic, and as I have shown on many occasions, PRASM has had a comparative decrease has been on going since Jeff took over, and it reversed increases which United had made in 2010/2011.

p.s. I will concede one point, which is that PMCO with its fortress hub focused operation, had been cutting back on FF benefits (having started TODs and highly discounted F) and its product steadily for a few years before the merger, and it had not hurt comparative PRASM. In their arrogance and ignorance (a bad combo IMHO) they assumed this approach would work in highly competitive UA markets. That was the big mistake with the merger, one that United unfortunately has never been able to reverse (which is a point that J. Edward made above). As such I think the situation is 180 degrees the opposite of how you see it. United had the wrong strategy for its post merger network, which had the potential to attract yet more high value traffic, given how great the network was, but instead of setting service levels these mobile travelers would find acceptable, UA pretended it was an airline with captive hubs. that did not work out so well...

Adelphos

It's funny - airlines are the one of the few industries when paying customers of the industry de-emphasize quality of service in operations when ranking airlines or choosing between them

ryman554

I'm not sure what you mean here.

It's an airplane. The criteria for using said product -- let's call that "quality" -- is its ability to get from A to B:
1. Safely
2. Reliably (ie, on time)
3. Cheaply
4. Comfortably.

And, importantly, it's the perception of the above that matters more than the actual data.

While we like to think there is some tradeoff between #3 and #4 , RyanAir and the ilk definitively put that debate to rest.

Under what metric, then, are paying customers ranking airlines incorrectly?

jasondc

Still dont understand this intense focus on UA and SEA and JFK. UA had MAYBE 25-30 flights max at those places at the very peak, and that was the better part of 20 years ago. UA long ago decided that its resources could be better utilized elsewhere.

eng3

And it should be on-time arrival at the GATE. Even when landing early, having to sit and wait for your gate to open up hurts too.

3Cforme

It's covered in 14 CFR 234.4.

(f) Actual arrival, departure and elapsed times shall be measured by the times at which the aircraft arrived at and departed from the gate or passenger loading area.

entropy

UA did have a fortress hub: CLE, with the highest RASM and O/D % in their system. They closed it because of the RJ pilot shortage and blamed it on the city.

Both (xCLE) , EWR and IAH are relatively insulated from competition, while SFO, LAX, IAD,DEN are highly competitive, if large markets. UA offered great benefits to elites, and used MileagePlus as a competitive driver to keep people on-metal as much as possible.

CO's mentality was that people had no choice, and that worked when you're in CLE, EWR and IAH. It doesn't work in competitive markets.