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Table of Content.I.Introduction.Backgroun.Financial Information.
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II.Industry Analysis.Rivalry among Competing Sellers.The Potential Entry of New Competitors.Competitive Pressures - Substitute Products.
Competitive Pressures - Supplier Bargaining Power1.
Competitive Pressures - Buyer Bargaining Power1.III.Company/SWOT Analysis1.
Strengths1.
Weaknesses1.
Opportunities1.
Threats1.IV.Strategic Analysis1.V.Recommendations..Tuesday, September 11, 001 was the day that terrorists attacked the United States by turning American icons such as jet airliners and skyscrapers into weapons of mass destruction. The attack on the U.S. was a well thought out plan that intended to kill thousands of innocent people and to damage U.S. businesses and industries. In the immediate days after September 11th, the U.S. government ordered all commercial airlines to be grounded as safety precautions against follow up terrorist attacks, which severely crippled the already struggling airline industry.
Two of the four planes that crashed on September 11th were United Airlines flights scheduled to make cross-country trips. The combination of losing two planes in the terrorist attacks and the cancelled flights during the four days after the attacks resulted in the loss of many millions of dollars for United. Airline companies have huge operating expenses due to the nature of the business, which include maintaining the airplanes and purchasing the fuel. When the planes are not in the air, they are just sitting at the airport gates burning through cash. The only time the airline companies are making money is when the planes are in the air. Many airline companies have extremely high cost structures due to the large overhead requirements of the industry, which means that the four days of grounded planes put the large airliners in serious financial trouble.
United Airlines is the world's largest air carrier, operating one of the largest fleets in the world. The terrorist attacks that brought down two of its planes and the following four days of suspended air travel cost United around $ billion dollars. United is faced with a variety of problems right now, but the most important task is getting people back on the airplanes. It has to rebuild its reputation based on safety to reassure travelers that it is okay to fly again. Other important tasks that must be accomplished are the restructuring of order contracts to match the softening demand for air travel, the integration of the work force to quell any labor disputes that might damage the company's well being, and the improvement of safety measures to restore passenger confidence.Backgroun.United Airlines is the world's largest air carrier and the second largest in the U.S. United is owned and controlled by its parent company UAL Corporation. The employees own Fifty-five percent of UAL, making it the world's largest employee owned company (MarketWatch.com). The fact that its employees own UAL makes labor disputes with the executives difficult. This will be discussed in more detail later in the case.United has hubs in San Francisco, Chicago, Denver, Los Angeles, and Washington D.C. and also has key international gateways in Tokyo, London, Frankfurt, Miami, and Toronto. United flies to 1 destinations in twenty-eight countries with around ,00 flights per day (MarketWatch.com). UAL's official headquarters is in Chicago and it trades on the New York Stock Exchange using the ticker symbol UAL.Prior to the terrorist attacks, the airline industry was already facing a slow down due to the weakening economy. For the fourth quarter ending in December 000, UAL posted a $14 million loss equating to a per share loss of $.41. For the full year of 000, net earnings were $50 million, which comes out to a gain of $0.04 per share. Below is a chart comparing these historical numbers to the recent financial numbers to better illustrate the downward trend prior to the attacks.(in millions except EPS)00011.Operating Revenues1,518,0717,56.Operating Expenses18,6816,6616,0.Earnings From Operations6541,11,47.Net Earnings501,58.Net Earnings per share0.04.46..
(000 Annual Report.
.Looking at the above chart, it is obvious that the earnings from operations have declined significantly from 1 to 000 and net earnings have decreased from $1. billion to $50 million. This huge decrease in earnings is due to the higher cost of fuel and labor and also the decrease in higher yielding business travel. The softening U.S. economy has forced companies to purchase more economical tickets for its traveling employees rather than allowing their employees to travel first class. Companies are putting restrictions on its traveling employees by no longer allowing first class travel at the company's expense. The reduction in the high yield business traveler is having a negative effect on United because, although business travel only accounts for % of traffic, it accounts for about 46% of United's revenues (Carey, 10//01).The entire airline industry was turned on its head September 11th. Millions of dollars were lost due to the loss of planes in the attacks, four days of no flights, and a decrease in passengers due to fear. United has been forced to take reactionary steps such as re-negotiating order contracts with Airbus and Boeing to reduce the amount of expected planes. United had to lay off 0,000 employees, which is twenty percent of its work force, and replace both the CEO and CFO.The third quarter results have been released for United and are totally reflective of the tight situation the airline companies are facing. United posted a net loss of $54 million dollars in the third quarter and losses are expected to be around $.5 billion for the year 001. Fourth quarter results have not been released yet, but analysts are expecting losses to be much higher in the fourth quarter. The reduction in capacity has slashed the revenues generated by United for the third and the fourth quarter. The company is burning through approximately $1 million every day trying to balance the high overhead costs with smaller revenues (Peltz, 1/05/01).
United was supposed to enter into a joint venture with American and Delta to provide funding to Boeing and its new satellite based broadband program. Boeing's new program called Connexion is a mobile satellite technology that will deliver broadband capabilities to passengers while in flight. After the September 11th attacks, cash strapped United pulled out of the venture to conserve money. Boeing is still going ahead with the new venture despite losing the funding from the airlines (Lunsford & Pasztor).
When the markets opened up on Monday, September 17, UAL's stock price took a nosedive. In the four or five days after the terrorist attacks, UAL's market capitalization was cut in half. The stock price closed at $0.8 on September 10th and when the market opened again the following Monday, it closed at $17.50 (Press Release United).
United is considering every possible cost cutting method in order to gain control of its high cost structure. The new CEO, John Creighton, has indicated that he is willing to go as far as cross company pay cuts in order to turn the company around. Even the slightest inclination of pay cuts has infuriated the United mechanics because they were in the process of re-negotiating their contract when the terrorist attacks came. Last year all United pilots received huge raises, while the mechanics did not receive anything. At this point in time, a raise for all the mechanics is nearly out of the question and this has prompted the mechanics to threaten the company with a strike. The mechanics are in a heated battle with the executives; meanwhile the executives are trying to keep the company from going under. This labor dispute could not have come at a worse time for United. The regular employees believe that the executives are doing a bad job and are demanding that many be removed. The attacks have made it impossible for the company to appease the mechanics with a pay raise, creating extremely low morale among the employees and disunity between the executives and the other employees.
The airline industry was already in a downward spiral when the September 11th attacks exacerbated the situation. People are afraid to fly, forcing United to significantly reduce air capacity and cancel orders with Boeing and Airbus. The attacks have also created a huge labor dispute within the company pitting the executives against the operations staff. Since the employees own UAL, they have more bargaining power than most other companies. United has to resolve this labor disunity before the demand picks up for air travel or competitors are going to steal market share. The events of September 11th have changed the entire country, with major impact on the airline industry. Security is becoming much tighter, which translates to higher costs. The high costs of the airline industry can only be defeated with higher revenues, which will only happen when people are no longer afraid to fly.Financial Informatio.The following chart outlines the effects felt by United Airlines after the attacks of September 11th in relation to last year's financial results.Financial Summary (in millions)Three Months Ended September .
001000%Chang.Operating Revenues407416(16.7.Operating expenses484844(1.7.Special charges11.
616144.Loss from operations(064)(0.Looking forward from the negative financial effects of the third quarter, the following table summarizes the company's expectations for expense factors affecting fourth-quarter and full-year performance.Year-over-year Percent Increase (Decrease.
Fourth Quarter 001Full Year 00.Available seat miles(1%)(6%.Fuel price per gallon, avg(1%)8.Operating Exp per available seat mile6%6.INDUSTRY ANALYSI.Since the action-forcing events of September 11th, the airline industry has suffered a string of direct and indirect repercussions. While United has felt the effects of low capital and reduced business caused by traveler apprehension, it has also felt its own set of unique consequences. A diagnosis of the commercial airline competitive environment is illustrated and explained on the next page in the form of Michael Porter's Five Force Model...Rivalry among Competing Sellers - High While airlines have long competed on cost leadership, the changing conditions associated with air travel require attention to other areas of customer satisfaction. In particular, United must address its on-flight service and amenities. Southwest airlines was quick to grab market share in the west coast shuttle market, and by the time United had arrived with its own shuttle service in 14, many customers had already grown accustomed to Southwest's friendly, no-frills style. The Wall Street Journal noted that passengers felt that they were receiving "less service and a less comfortable ride for the exact same price." Hindsight shows us that, because United could not provide comfortable shuttle service as efficiently as its rival, and once September 11 forced airlines to put an even greater emphasis on cash reserves, the company was forced to discontinue all 468 daily flights run in coordination with the shuttle service before they could ever generate a profit (Costello, 001).Airlines such as Virgin Atlantic have already begun to address the new safety issues that customers demand from the carriers. While discussion of safety with customers has traditionally been frowned upon by the industry as a whole, United has been among the few aggressive airlines jumping on this new trend. The company makes no secret of its plans to purchase $800,000 worth of Taser guns for use in every cockpit of its fleet, a policy that no other airline has even come close to matching. In addition, it will install the reinforced cockpit doors that will make the pilots more defensible to hijacking. Third, United reports that it will offer new self-defense training to its flight attendants, pending Federal Aviation Administration approval (Carey, 11/16/01). With rivalry being the strongest factor in the industry, such promises show a strong, proactive commitment to alleviating the fears of air travelers, whether spoken or unspoken.The Potential Entry of New Competitors LowEntry into the airline industry has always required a large capital investment, but with diminishing profits for even the top carriers in the business, the threat of potential competitors is minimized further. Start-up losses would be higher now for a new airline than ever before. While other factors such as customer loyalty and brand preference may be low for many customers, they are not low enough to be ignored by a fledgling commercial airline (as shown in the rivalry example with SWA). The text notes, "the best test of whether potential entry is a strong or weak competitive force in the marketplace is to ask if the industry's growth and profit prospects are attractive enough to induce additional entry" (Thompson & Strickland, 001). Under the current circumstances, the answer is a resounding no.Competitive Pressures from Substitute Products Moderate The American Automobile Association reported that 0 million people traveled this Thanksgiving holiday, reflecting a decrease of only percent from last year (Guzman, 001). Amtrak sold 15 percent more advance tickets for Thanksgiving travel this year, and reported an increase in rail travel over the six-day period, but did not disclose exact figures after Thanksgiving weekend. In addition, Greyhound Bus Lines predicted an increase of 800,000 riders over last year's figures for the holiday travel period (DJN, 001). Finally, AAA reported that 87 percent of those traveling over Thanksgiving planned to travel by car (Guzman, 001). While this can be seen as partly due to falling gasoline prices, the theory that Americans now have a significantly greater fear of flying is unavoidable. Even though many airlines called the Thanksgiving holiday travel numbers a success, and boasted that many of their planes flew near capacity, a trend away from air travel is clearly present after September 11.
In addition to travelers finding alternate modes of transportation, teleconferencing use has seen an increase. The Wall Street Journal Online reports, "Conferencing services have actually been one of few industries to benefit from the Sept. 11 attacks, as companies seek alternatives to travel. TeleSpan projects the industry will do about $ billion in revenue this year." While some of this change can be attributed to the improvements in technology that make teleconferencing easier to use and more cost-efficient, analysts admit that there is a relationship to the paranoia that many corporate executives feel about getting on a plane with the current threat of terrorism (Wingfield, 001).Competitive Pressures from Supplier Bargaining Power ModerateIn mid-November, United announced that it would reduce delivery of new aircraft for the next two years from 67 to 4, a reduction worth $.4 billion in costs (Chow, 001). This loss of financing across the airline industry has put strains on manufacturers Boeing Co. and Airbus Industrie, subsequently forcing them to cut costs themselves and find ways to operate more efficiently.
The federal government must now be considered a short-term supplier, as the airline industry has turned to Congress for cash bailout packages ever since the FAA grounded all U.S. flights in the days following the September 11 attacks. While it can be said that aircraft manufacturers have a substantially weaker position in the industry analysis model, the federal government enjoys a greater sense of bargaining power. It can now mandate security measures, favorable business practices, and new structuring in commercial air travel.
On another level of the supply chain, United faces complications in the labor capital market from the International Association of Machinists Union. The mechanics have recently threatened the company with a strike, and even with the government's promise to intervene and delay a strike, United faces difficulties that other airlines are fortunate enough to avoid in these economically strained times.Competitive Pressures from Buyer Bargaining Power Hig.United has been quick to respond to the potential demands of customers for new security measures including non-lethal stun guns in cockpits, reinforced cockpit doors, sky marshals, flight attendant training, and federalized baggage inspections. Although the FAA has yet to approve all of these new measures, United has unequivocally stated that it intends to take every necessary step to make its customers feel safer. With some airlines aggressively pursuing these new guidelines of airline security, and some proceeding with less emphasis on them, we could very well see airlines competing more on differentiation than cost leadership in the next few years.
The new economics of information have made their mark in the airline industry, through travel sites such as Travelocity.com, Expedia.com, and the airline-designed Orbitz.com. These sites provide the customer with easier access to flight information and prices, consequently extending the reach of the information formerly unavailable to many consumers. Such disintermediation forces airlines to lower prices in order to increase market share, as customers will apply greater pressure to their carriers to give them the best price.COMPANY / SWOT ANALYSI.Strength.The strengths give us an overlook of the characteristics that give a company its enhanced competitiveness. In any market, a recognizable name can be incorporated into a company's mission and vision. The name "United" gives UAL a personal touch, creating a focus on personal relationships that it strives to secure with its customers.The biggest advantage that United has over its competitors is that they are "first movers" in taking high security precautions on their aircraft. On November 15, 001 United Airlines announced two major security initiatives to be implemented throughout the company. They are the first major airline to install advanced technological Taser weapon devices in their cockpits. This, in turn, puts substantial pressure on the Federal Aviation Administration (FAA) for quick action on approvals. The Taser guns will be installed in electronically-coded lock boxes and will be available to the pilots to defend the cockpit. Executive Vice President and COO of United Airlines stated, "United and its pilots believe Tasers are an important addition to enhanced cockpit security. Tasers will incapacitate an attacker without endangering the airplane" (Nov. 15, 001- United Press Release).The second initiative involves security training for all flight attendants on a United aircraft. United is also the first to propose and implement such a program that will train fight attendants with skills and knowledge to protect themselves and properly assist customers in a possible attack situation. Senior Vice President for onboard service Sara Fields commented, "We have worked diligently to create a program that provides our flight attendants with the knowledge and skills required to ensure their security and safety. We recognize that this training is only a first step in what will be an evolving process" (Nov 15, 001- United Press Release).United Airlines recently appointed Mr. John W. Creighton as chairman and CEO of the company by a unanimous vote. The unanimous vote leads us to believe that the company must have a great amount of trust in the business skills of Mr. Creighton. The company needs someone who can quickly and efficiently restore UAL's financial status that it had before the attacks of September 11th. Mr. Creighton announced, "Our immediate goal is to restore United's financial stability….We will continue to cooperate with the government and our regulatory agencies to provide the highest level of security both on the ground and in the air. This is what our employees, shareholders, and customers expect, and this is what we will deliver" (Oct 8, 001-United Press Release). Mr. Creighton has been a director of UAL Corporation since 18 and has experience as a CEO for Weyerhaeuser Company from 11 to 17. United Airlines hopes that Mr. Creighton's new position will allow him to incorporate effective strategic plans to primarily increase financial status while keeping security and customer service as the primary priority of the company.UAL's Internet service division, "new ventures", has had major success in 000 with a growth of almost 50 percent in sale from 1. As with many other businesses, the Internet is a great path in which a business can reach its customers. This is a great strength that United should continue to support in order to regain financial stability throughout the entire corporation.On October 1, 001, United Airlines introduced two new "Back to Business" fare options for business travelers. These two new options would adhere to business travelers who are able to book their tickets in advance to their traveling. Travelers are awarded 50 percent off the original business fare prices if they order tickets 1 days or more in advance. Up to 5 percent off is given for a 10 day advance order. These tremendously low prices are responsive to the customers needs and are helpful to help quicken the flow of all businesses. These two options were scheduled to last only till the end of the year, but positive responses from the public pleased UAL, so these low fares will be extended through March 1st of 00. Business travelers are given more choice and flexibility with these new rates. This gives United a positive outlook on regaining customer approval as well as high quality name recognition.United Airlines has restructured its delivery of aircraft with both Boeing and Airbus Industries. Many of their 001 aircraft has already been delivered prior the attacks of September 11th, but United will collect all aircraft scheduled to arrive in 001. They will only accept about half of the aircraft schedule to be delivered in 00 and none of the planes that are to arrive in 00. Between 00 and 00, United will reduce is costs for aircraft by $.5 billion. Along with this, United is able to claim that it carried the world's youngest fleet of airplanes, showing that the average age of their planes is about 8 years old. This is a significant strength for United because it will relay to customers that the newer planes will assume to be more advanced, branding them more secure aircraft.Weaknesse.United Airlines direct involvement in the September 11th terrorist attacks is an unavoidable weakness that the corporation must face. The attacks called the entire airline industry to re-design their security measures taken to ensure safety to the customers. United was forced, like many other airlines to cut its workforce. They cut 0 percent of their workforce, which amounted to 0,000 employees forced to lose their jobs. This was a difficult, yet necessary, decision by the management team of UAL.UAL's major weakness is conflicts with the International Association of Machinists Union (IAMU) generating possible strikes in the near future. United was having trouble with the IAMU due to the possible United-US Airways merger back in March of this year. The merger never occurred due to government regulations suggesting that the merger could lead to a monopoly in the market. The Bush administration said that President George W. Bush is prepared to take the necessary action to block a threatened strike by United Airline (UAL) mechanics. White house spokesman, Ari Fleischer said, The president is deeply concerned, especially at this time of year, about any disruption in airline service to the traveling public. He is also concerned about any negative impact a strike could have on the economy (Nov 1, 001-Wall Street Journal) If there is no creation of a Presidential Emergency Board to intervene in these disputes, it is possible that 15,000 mechanics could legally walk off the job at the nations second-largest airline just before the holidays. Presidential intervention of strike discussions has proven to be effective in the past. Earlier in the year in February, Northwest Airline mechanics were planning a possible strike. President Bush's intervention in this matter brought negotiations back to the table. Now, as the airline industry is struggling, President Bush assures us that there will be no immediate disruption due the conflicts arising between United and the IAMU. There is a 0 day "cool off" period given and if the Bush Administration does decide to intervene, the Presidential Emergency Board would have 60 days to study the issue and recommend a solution. That would mean that any strike by the mechanics couldnt begin until Feb. 1. There is an expected heat coming from the Union and a possible strike is on the way. United, in return, says that these discussions are for the benefit and safety of their customers. (Nov 1, 001-Wall Street Journal.The final weakness that we have determined is the most recent third quarter loss of $54 million in November along with the even greater loss prediction of December. The continued losses are to be expected, but in turn can create UAL to make forced decisions. Increased losses can lead to more cuts in the workforce and a possible downsizing of the company. The quickness of effective strategic options will determine whether or not these weaknesses will be conquered in the months to follow.Opportunitie.The value of market opportunity is a big factor, which will shape the strategic plans that UAL intends to implement. The airline industry being at its lowest point signifies that any strategic opportunity to gain revenues would be healthy for the corporation. The coming of the Spring Season is the perfect opportunity for UAL Corporation to plan special travel deals or packages. Many people usually plan ahead to travel to warm climates in the spring as well as planning family vacations. UAL has an opportunity to continue the use of the Internet and their "new ventures" division in congruence with other special package deals to attract a majority of customers. Their "first mover" advantage on security measures opens much opportunity to gain recognition as the most secure airline in the industry.Threat.The largest threat that UAL faces is the possible strike by the International Association of Machinists Union. A strike such as this could have a devastating impact on the industry as well as the economy. The decline in revenues and the vast lay off of employees could also cause a possible threat of strike by other UAL employees. The recovery of financial stability is a key factor in putting these threats to an end. Southwest Airlines and other small airlines are a possible threat to large airlines like United. Southwest dominated the West Coast Shuttle market over United. If United continues to get beat by smaller corporations in certain markets, they could slowly lose control in a market in which they once dominated. The continued predictions of loss as the months pass by are a threat. The month of December is predicted to have a significantly greater loss then they have experienced in November. The final threat to United is possible technology faults. It is a powerful strength that United is implementing new security technologies into their aircraft, but there is always a possibility of faulty equipment and imperfections. Technologically advanced devices mean that United has to take extra precautions by performing continued tests on each device.Summary Chart of SWOT Analysi.StrengthsWeaknessesOpportunitiesThreat.-First Movers-Pressure on FAA-Name Recognition-New CEO-Online Sales-Low Cost Fare Options-Youngest Operating Fleet-Direct Involvement of Sept. 11-0,000 Employees Laid Off- IAMU Strike-Third Quarter loss / 4th quarter expected to be worse-Special Travel Deals-Continued use of internet to produce high revenue sales-First Mover Advantage-Strike-Southwest domination of West Coast Shuttle Market-Continued Quarterly losses-Technology Imperfection.STRATEGIC ANALYSI.United Airlines has cut 0,000 jobs and about 750 daily flights since the September 11 attacks. It lost $1.16 billion in the third quarter and said it burned cash at a rate of $15 million a day throughout October (Brannigan, 001). The company admits that this is its worst year ever, and it goes without saying that the company needs a strategic overhaul more than many of its competitors in the industry.A Strategic Look at the Airline Industr.Placing the September 11 attacks aside, there has been a great deal of change in the airline industry over the past 5 years. The Internet has changed the way information is generated and distributed, as well as who can get to it and who pays for it. This was illustrated extensively in Blown to Bits, and many of the concepts discussed by the authors apply to the airline industry..Richness and reach used to exist in a tradeoff a company could either make its information available to many customers or customizable to a few, but never both. These days, a company can use the Internet to take its rich information to a broad base of customers, who can apply it to their own interests and needs more easily than without the Internet.To apply this concept to the airline industry, we can consider travel sites such as Travelocity or Expedia. Customers can enter in their own needs and receive a variety of options on a number of airlines. Customers then select a flight based on price, convenience, or flight amenities, and finally purchase the tickets from the site. While this has extended the richness and reach of the airline industry's information, individual airlines do not compete on reach. If they could, a company such as United would strive to gain such a strong customer following that it could sell airline tickets at minimal prices, and receive revenue from the advertisers on its website. Blown To Bits calls companies like this "navigators." Amazon is an example of a company that has had relative success employing this new business strategy. Competitors find it difficult to gain ground on navigators like Amazon because Amazon's customers receive rich information at a low price and are, consequently, very difficult to steal away. United has found ways to increase the richness and reach of its website information, such as offering travel itineraries in various currencies and languages. As an airline operating in 7 countries, such customizable information is vital to the success of the company.United Airlines has found ways to compete on richness through its NewVentures subsidiary. UAL proclaims that NewVentures is responsible "for all strategy, operations, planning, and support of United's website." As an innovative way for consumers to receive flight information on their cellular phones, pagers, or handheld computers, NewVentures has won several awards for expanding and enhancing United's business. In early September, Smart Business named United as one of the top 50 companies to successfully implement the Internet into its operations and improve the way it does business for the second straight year (United.com, 001).Affiliations are recognized as a key success factor in today's airline industry. In fact, such cooperative strategies between September 11-affected companies play an important role in the rebound of travel. For example, Virgin Atlantic offers its upper class and business class fliers a $50 gift card to The Sharper Image with a flight to London. Delta Airlines has allied itself with Universal Studios to let children fly and stay in a selected hotel free of charge when a parent purchases a vacation package from Delta. Behind the scenes, these affiliations are lowering costs for all partners involved, allowing them to charge their customers less for the final packaged product..While United has alliances with over 100 companies through its Mileage Plus program, many customers are not made aware of the alliances until they have visited United's website and purchased a ticket (United.com, 001). If United made the alliances known to the public in advance of their ticket purchase, customers would be more likely to participate in the programs available. In contrast, Virgin Atlantic's promotion with The Sharper Image is highlighted on its homepage, and Delta began advertising its travel package to Universal Studios on network television stations in the first week following the September 11 attacks.Disintermediation, the removal of a link in the value chain, is also applicable to the airline industry. While customers currently purchase tickets through online travel agencies, many analysts have grim outlooks for sites such as Travelocity and Expedia. Online travel agencies are in a weak position, compared with large carriers and hotel groups, particularly because of their weak market shares and the limited value-added of their services," claimed an analyst at a large French bank in a Dow Jones Newswires report (Venck & Barsony, 001). Such assumptions are supported by the creation of Orbitz.com by United States air carriers, and the proposed competitor "Opodo" by European airlines. Travelocity.com charges a fee of $10 per ticket to a customer, and receives only 5 percent commission on the ticket sale, down from percent two years ago. Cash reserves are an imminent problem for Travelocity, and the industry will ultimately squeeze out such minor players in the distribution system. They will most likely be acquired by airline or hotel groups, or be forced to adapt to the changing conditions by finding a niche market to serve, such as last minute travel bookings.The increase in the use of information technology in the airline industry represents the deconstruction concept outlined in Blown To Bits. The information available to the consumers about the flight, its price, and comparable trips on other carriers considers the sum of the advantages of the value chain. Deconstruction comes into play when a customer elects to fly from, say, Baltimore/Washington International Airport, rather than Philadelphia. If the customer can leverage a better price by leaving from BWI, airlines are forced to lower prices and increase convenience to the customer.RECOMMENDATION.When a company is suffering financially, dealing with negative publicity, or when its overall industry is in steady decline, it must take action to either improve it operations or prepare itself for market exit. As a crisis-ridden business in a generally weak industry, United can choose to employ one of the following basic strategie.·Fortify-and-defend modify the existing strategy in order to maintain the status qu.·Offensive turnaround strategy come up with financial resources in order to differentiate the company in a new way, with the goal of moving up the industry ranks in the long ru.·End-game strategy minimal reinvestment in order to gain short term cash to be used to exit the marke.·Immediate abandonment strategy sell the business or cease operations if there is no buyer (Thompson and Strickland, 71.We recommend the second option, an offensive turnaround strategy. Financial resources are needed in order to employ this option, but we believe that the airline industry is much too important to the public for one of the industry's largest carriers to settle for anything less than its best efforts at improvement. As for the financial resources needed to turn the business around, United has about $.7 billion of cash and $4 billion of unencumbered planes and other assets, which means United can use them as collateral to borrow several billion more dollars. However, we do not recommend using too much debt since, as of September 0, United already has around $8. billion of long-term debt and lease obligations, much more than a number of its competitors (Peltz, 1/05/01).In order to implement an effective turnaround strategy, management must analyze the business to find out what is at the root of the problem. For United, the major problem lies in its high cost structure, mainly its labor and fixed costs. Of course, this would not be a problem if revenues were where they should be, but with the downturn in the economy and the recent terrorist acts, United has been unable to make a profit since the second quarter of 000, when it made $7 million (Armstrong, 11/0/01). Thompson and Strickland outline the following actions as ways to successfully turn around a struggling busines.·Sell off assets to raise cash and to save the remaining part of the busines.·Revise the existing strateg.·Launch efforts to boost revenue.·Pursue cost reductio.·Use a combination of these efforts (7.While for the long run we suggest that United create ways to get people flying again, for the short run we believe United should cut costs, specifically labor costs. In October 000, United gave its pilots a increases in salary ranging from 1% to 8% and now, more than ever, the airline is feeling the impact of that decision. United's cost structure is one of the highest in the industry, with its labor costs comprising about 40% of its operating expenses (Carpenter, 11/5/01). However, cutting labor costs is no easy task since there is already much contention between employees and upper management at United.
United has already cut 0,000 employees, or about 0% of its workforce. The International Association of Machinists and Aerospace Workers, which represents 15,000 United mechanics, recently rejected a federal offer of arbitration from the National Mediation Board. The mechanics have not had a raise since 14 and have been in talks with United since December 1. Currently, United is in a cooling off period from negotiations over the mechanics' contract (Crawley, 11/0/01). James Higgins, an analyst at Credit Suisse First Boston in New York said, "If labor wants there to be any longer-term growth, they're going to have to help this company out" (Peltz, 1/05/01). On Thursday December 0, 001, the mechanics will vote on whether or not to strike.
We suggest that new CEO John Creighton focus on senior management's salaries, including his own. Small temporary reductions in huge upper level management salaries would allow a small (much deserved) increase in the mechanics' wages. Employees, other than mechanics, are extremely dissatisfied with senior management's performance. "All of us (union groups) are unanimous that the management is absolutely dysfunctional," Rick Dubinsky, head of the United pilots union and a UAL board member, said. "I believe Jack Creighton will recognize some of that dysfunction and will make appropriate changes" (Carpenter, 11/5/01).If certain executives are ousted, employees will be much more willing to take a cut in pay. "We will not just take a pay cut and show up on Monday morning," Dubinsky said. "We're going to get something valuable in exchange for it." He said that certain unidentified United executives "have to be replaced. He [Creighton] should take them out" (Peltz, 1/05/01). Mr. Creighton himself could forgo a substantial portion of his salary until United begins to see a profit again. In short, when considering wage cuts, United should start at the top, not at the bottom. This will boost morale and ensure a more aligned workforce. It will also give upper management greater incentive to quickly generate a profit.The second major issue on which United should focus is revenue-generating schemes. United needs to concentrate on a long run strategy of getting people back in the air, more specifically, back in the air on United Airlines. United's western travel areas have been hurt the most since the general slowdown in air travel. Therefore, we suggest that United give people plenty of incentive to fly out to the western states. It could begin building temporary partnerships with hotel chains and travel agencies that offer discounted travel to the areas where United is hurting the most.United has already begun to do this by establishing a relationship with Vail Resorts in Denver, CO. United is offering that one child flies free to Vail Ski Resort, where that child will also receive free lodging and one free lift ticket when accompanied by an adult (PR Newswire, 11/0/01). United should offer other such incentives to families who may be considering a vacation, but who are reluctant to fly.United is also expanding the ways people can earn frequent flier miles on its Mileage Plus program by increasing partnerships and giving more bonus miles. However, many people are not aware of the many ways that they can earn miles. United should increase awareness of its Mileage Plus program by distributing literature to all passengers that board the plane. In addition, it should make sure that partnering firms display the United logo in a visible area either on their advertisements or in their business locations in order to peak customer interest in Mileage Plus. United should also consider temporarily reducing blackout dates and certain restrictions on earning miles, until business picks up again.Finally, United should make a determined effort to make its airline the best in service and safety. Most people will reevaluate the airlines and use their research to decide which one they fly. United needs to be in the top rankings in on-time flights, in baggage claim, and in overall customer service. Safety is a top priority for everyone and United needs to be a first mover in terms of providing the safest airplanes possible. Investments have already begun in implementing a program that would provide the aircrew with Taser stun guns. Bullet proof cockpit doors and other safety measures should be considered. Making the customer feel safe and giving people the most enjoyable flying experience will ensure return passengers and will improve United reputation.Creighton has experience in negotiating with unions and he is working hard to keep his employees happy while making sure that United does not run out of cash. This is an extremely important task because eventually the economy will rebound, but employees may not forget Creighton's actions. On the other side of the equation, employees need to do everything possible to make sure United is the airline of choice, even if that means taking a temporary pay cut or stalling negotiations until the company start seeing a profit again...
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