After a troubled merger, United finally turns a profit—but fails to grow
Early last summer, a team at United Airlines set out to discover what bothered its passengers most. The airline collects 8,000 customer surveys a day, and there was a lot to choose from: Was it extra fees for luggage? The lack of legroom? The sour, thin coffee? Was it being forced to spend 20 hours in a frigid military barracks in Newfoundland (as passengers on a United flight to London did last June)? How about the carrier’s tendency to lose the one bag you really need? (On June 17, 2014, Rory McIlroy tweeted: “Hey @united landed in Dublin yesterday morning from Newark and still no golf clubs... Sort of need them this week.”) Could it be the problems with the reservation system that caused widespread delays in 2012, and again in 2014, or the computer glitch on July 8, 2015, that led the airline to suspend all its flights, all over the world, for two hours? In October, United failed to provide a wheelchair to a passenger with cerebral palsy; he had to crawl off the plane.
Every airline has its horror stories, of course— air travel is full of opportunities for customer disenchantment. But United has proved an industry leader: On all major performance metrics—delays, cancellations, mishandled bags, and bumped passengers—United has, since 2012, been reliably the worst or near worst among its competitors. In 2012, according to the U.S. Department of Transportation, United was responsible for 43 percent of all consumer complaints filed against U.S. airlines. It finished last among North American nondiscount airlines in the 2015 J.D. Power & Associates customer satisfaction survey. Recently the carrier agreed to pay $2.8 million in fines for tarmac delays and the poor treatment of disabled passengers. “United is off-the-charts worse than anything I’ve ever seen,” says Lenny Mendonca, a retired senior partner at McKinsey. Despite having flown more than 3 million miles with the airline, he says, “If I have any other alternative, I will fly someone else.”
It’s been five years since United Airlines and Continental Airlines combined to form what was at the time the world’s largest carrier, and the merger hasn’t gone well. In 2012 and early 2014, when American Airlines Group, Delta Air Lines, and Southwest Airlines reported large, and in some cases, record profits, “the new United” lost money. Earnings calls became an opportunity for then-Chief Executive Officer Jeffery Smisek to apologize. “I know we created some customer disservice because of all the changes we made so quickly, and I apologize for that,” Smisek said in July 2012. “We know we can do better and are taking actions to do just that,” he promised in April 2014.
For the CEO, however, things got worse. Last September, Smisek resigned along with two other top executives as the Department of Justice investigated whether the airline had tried to improperly influence the Port Authority of New York & New Jersey, which operates the region’s major airports. One month later, Smisek’s successor, Oscar Munoz, suffered a heart attack and went on medical leave. On Jan. 6 he had a heart transplant. Although United promises he’ll return “at the end of the first quarter or the beginning of the second quarter of 2016,” no one can deny that a company that had long endured calls for a shake-up has been well and thoroughly shaken in a way that has both complicated and catalyzed its efforts to reintroduce itself to the world.
“We’ve been out front acknowledging that, ‘Hey, it would have been great to get it together before year five,’ ” says Brett Hart, United’s general counsel and interim CEO. But the airline, he insists, is getting it together now: United’s numbers for on-time arrivals, cancellations, and baggage handling in recent months have been the best since the merger. “People see the planes coming in and going out on time,” he says. “Employees’ interactions with customers are different. Our customers’ response to the service is improving. People are saying, ‘You know, this feels like a new day.’ ” The second quarter of 2015 was the airline’s most profitable ever, with $1.3 billion in net income, excluding special items. In the third quarter, it climbed to $1.7 billion.
There have been false dawns before in the long saga of the United and Continental merger—it’s the Zeno’s paradox of mergers, never quite reaching the destination. Despite its record profits, the airline has still struggled to grow—year-over-year, revenue was down 4 percent in the second quarter of 2015 and 2.4 percent in the third. The improvements the airline has made have, in many ways, simply brought it back to where it began. After its “customer experience” team went through the complaints from last summer, it settled on a straightforward problem: the complicated boarding process United put in place in 2013, which it says it has fixed and will update soon. “It’s primed for improvement,” says Vicki Bryan, a transportation analyst at Gimme Credit who’s been particularly critical of United. “But I still see this company very much in limbo.”
Connie Garcia works in customer service for United at Newark Liberty International Airport. Her sister also works there, as does her husband, in facilities management. “It’s sort of a family business for me,” she says. She remembers hearing customers cheering in the terminals on Sept. 8. Curious, she asked around and learned that Smisek was stepping down. Gloria Reid, a flight attendant supervisor, was downstairs in the Newark crew lounge, where she says an impromptu party broke out. “Everybody was very happy,” she says, “extremely happy.”
The events that led to Smisek’s resignation took place a year after he became CEO of the merged airline. In September 2011, he and two of his senior government affairs executives had dinner with David Samson, the Port Authority chairman, at a Manhattan trattoria called Novita. Smisek was pushing Samson to make hundreds of millions of dollars’ worth of improvements at United’s Port Authority-operated
Newark hub. As reported last spring by Bloomberg, Samson asked for a favor in return: He wanted the new United to restore a discontinued Continental flight from Newark to Columbia, S.C., a short drive from a vacation house Samson and his wife owned.
Over the following months, Samson reiterated his request several times and said he was blocking the airport improvements. United added back the unprofitable flight. The “chairman’s flight,” as Samson liked to call it, was scheduled perfectly for his weekend trips and might have remained another obscure bit of New Jersey horse-trading if not for the Bridgegate scandal, which followed the intentional snarling of traffic in Fort Lee, N.J., by Port Authority officials and aides to New Jersey Governor Chris Christie to punish a local politician. Four days after Samson resigned, in March 2014, for his role in the traffic problems, the chairman’s flight was discontinued.
The U.S. attorney for New Jersey hasn’t brought charges against anyone at the carrier, but the company’s announcement made it clear that Smisek and the two other United executives at the dinner, Nene Foxhall and Mark Anderson, were stepping down because of United’s own internal investigation. Smisek left with a severance package worth $28.6 million. Smisek, Foxhall, and Anderson didn’t respond to repeated requests for comment.
Smisek, an attorney, had been part of the team that turned around the struggling Continental in the 1990s. Three months after being named that airline’s CEO, in January of 2010, he interrupted merger talks between United and US Airways to propose Continental as a better partner. “I didn’t want him to marry the ugly girl,” Smisek said of Glenn Tilton, then United’s CEO, a comment for which Smisek apologized to US Airways CEO Doug Parker, who now runs American.
People who worked closely with Smisek describe him as funny and extremely smart but also reserved and, on occasion, tone-deaf. One former Continental colleague remembers Smisek getting up from the table after a meeting with pilots union representatives and immediately pulling on the leather gloves he used to drive his Porsche. Bryan, the Gimme Credit analyst, argues that Smisek’s aloofness paralyzed his management team and made them slow to see problems developing. “You have an elitist culture problem,” she says. “And who is content to work for this kind of culture? Not the kind of person who’s going to step up and say, ‘We need to do it like this.’ No, they’re going to do what Jeff says.”
Many of the merged airline’s front-line employees complained that management, having promised significant savings to Wall Street, focused on cutting costs above all else. There were layoffs, furloughs, and baggage handling and gate agent jobs were outsourced. Former Continental employees say they’d been discouraged from giving out vouchers to placate unhappy customers who had been bumped from their flights, though United says they hadn’t been. Even the new airline’s uniforms seemed the result of cost-cutting. “There were a lot of complaints about the quality of the uniform,” Garcia recalls.
The depth of employee discontent helps explain the merged airline’s poor performance. “Unhappy mechanics do not tend to go the extra mile—or the extra foot—to get the airplane ready to go,” says George Ferguson, a Bloomberg Intelligence airline analyst. Longtime fliers noticed the delays, cancellations, and lost bags—and the short-tempered gate agents and flight attendants. “As individuals, they are really nice people,” says Jared Spool, a Web design consultant who flies 150,000 miles a year on the airline. “But they are in such a horrible situation, constantly trying to deal with customers that are not happy, and they’re completely powerless.”
Some of the problems that have bedeviled the merged airline were inherited. During a brutal three-year bankruptcy that ended in 2006, United slashed salaries, defaulted on its corporate-pension plan, and stopped upgrading facilities and replacing planes, leaving a deeply embittered workforce and one of the oldest fleets in the business. Everything from baggage handling to aircraft reliability suffered. And even today, some labor issues remain beyond the company’s control. The former Continental and United flight attendants, the only work group currently without a preliminary joint contract, are sharply divided over whose work rules to adopt. Until they decide, there’s little United can do.
One thing Smisek and his executive team clearly neglected was ensuring that flights left and landed on time, and building in allowances for the storms and mechanical failures that inevitably occur. Delta, by contrast, set out after its 2008 merger with Northwest Airlines to eliminate flight cancellations unrelated to storms and largely succeeded. The extensive tech problems of the United-Continental merger were also avoidable. Rather than combining the carriers’ reservations systems, websites, and frequent-flier programs over time, the company merged all three on the same day, maximizing disruption and confusion. And in adopting the passenger service system from Continental, the smaller of the two airlines, United had to train a much larger number of people to use different software. In the end, that training proved inadequate. Continental’s scheduling program, when adopted by the merged airline, lost track of pilots, leading to flight cancellations, and assigned flights to pilots who were retired or dead.
An incident on July 14, 2014, crystallized the lack of trust between United employees and management. A flight was about to depart San Francisco for Hong Kong when menacing graffiti—the words “bye bye” and two crude faces—were found
scrawled in oil on the fuselage. The flight attendants on board refused to fly unless the plane was given a full additional security sweep—Malaysia Airlines’ Flight 370 had gone missing four months earlier. United’s flight operations, safety, and maintenance teams, along with the plane’s pilots, responded that it had already been thoroughly checked. The standoff ended with the cancellation of the flight, and the flight attendants were fired for insubordination.
At 3:30 p.m. Central time on Sept. 8, United alerted analysts of a conference call that would begin an hour later. When the analysts dialed in, they heard Henry Meyer III, the company’s brand-new nonexecutive board chairman, announce Smisek’s immediate resignation. His replacement, Munoz, was a board member at United and, before that, Continental, but was otherwise an outsider to the airline industry. He came from CSX, where he was the chief operating officer and president. He’d been seen as a likely pick to run the rail giant—early in his career he’d worked both sides of the cola wars, first at PepsiCo and then at Coca-Cola. When an analyst on the call asked Munoz whether, in light of the sudden change at the top of United, any major decisions would be pushed into the future, he said that putting things off “is not entirely in my vocabulary, certainly.” When another asked when the company would choose a new chief financial officer (a post that remains unfilled), Munoz replied, “It’s my first half-hour.”
Munoz threw himself into the task of reintroducing the airline to its customers. He called Gordon Bethune, the beloved Continental CEO who had turned the airline around in the 1990s, and invited him to Chicago, where the two talked about how to repair the airline’s dismal reputation. United took out ads in newspapers across the country admitting that “we haven’t lived up to your expectations or to the promise and potential” of the 2010 merger. Munoz wrote an open letter to employees promising to “give you the right tools to deliver the service and reliability I know we are capable of.” He described a conversation with a longtime United flight attendant “near tears” who told him, “I’m just so tired of having to tell people I’m sorry.” During the hectic days before Thanksgiving and Christmas, United managers handed out free bottles of water to customers at the airline’s hubs—an updated version of a Bethune tactic.
Munoz talked to employees wherever he flew, often surprising them in their breakrooms. “He listens exceptionally well,” Bethune says, “and he understands the value of an engaged workforce.” On his second day on the job, Munoz walked the floor of the airline’s network operations center in Willis Tower, something people there recalled seeing Smisek do only a handful of times (usually with a camera crew in tow). In a story that quickly made the rounds, Munoz crashed an after-work employee party at a downtown Chicago bar. The approach seemed to be working. “I think the way to talk about it,” says Sara Nelson, a United flight attendant and the international president of the Association of Flight Attendants-CWA, “is the airline was just incredibly sick and Oscar Munoz is like a shot of penicillin. It’s going to get better, but it has to have some time to actually settle in and work.”
In late September, Mendonca, the former McKinsey partner, posted an open letter on the website Medium detailing his frustration with United. Munoz e-mailed him, and the two set up a time to talk on Oct. 15. That day, Mendonca got an e-mail from Munoz’s assistant saying the CEO wasn’t feeling well. As United confirmed the next day, Munoz had been hospitalized with a heart attack. The following Monday, the company announced Hart was the interim CEO.
Soft-spoken and courteously circumspect, Hart sat for an interview just before Thanksgiving in his Willis Tower office, down the hall from the one kept vacant for Munoz. Asked what it was like to be the interim head of a massive company, he smiled: “There’s no real book on it. I looked around.” But, he added, “Oscar was with us long enough for us to have a very good understanding of how he wanted us to think about executing the plan and the various factors that we should take into consideration: how something is going to impact the overall customer experience, how it’s going to impact our employees’ ability to provide great customer service, whether it’s innovative.”
Under Hart, the airline has kept up a steady stream of changes, some big, many small. On Oct. 23 it announced an agreement with the leadership of its mechanics union, then a month later a contract extension with its pilots. Both are contingent on votes by the unions’ members. The company declared a moratorium on outsourcing airport customer service and ramp jobs until 2017. Representatives from the company’s uniform vendors were brought in to hear employees’ complaints. Perhaps more significantly, the carrier brought back free snacks in economy class.
Then there was the coffee, an issue that, while hardly central to its business, symbolized United’s inability to get things right. On Nov. 19 the airline announced it was changing the coffee it serves on its planes and in its lounges from a brand called Fresh Brew to the Italian premium roaster Illy. It was welcome news to customers and to the flight crews used to fielding complaints. It was also a tacit admission that the choice of coffee after the merger, a decision that consumed thousands of man-hours, took nearly a year, and involved everyone from Smisek to the airline’s head chef to the flight attendants, hadn’t worked out.
More fundamentally, United is reexamining the way it boards planes. “There’s a lot of anxiety around the boarding process,” says Mandeep Grewal, the managing director who led last summer’s customer-satisfaction task force. “You repeatedly see lower satisfaction scores.” United’s boarding process—five cordonedoff lines corresponding to their own boarding groups—was instituted in 2013 to bring organization to the expectant throng at the gate. But what Grewal’s team found was that the lines were selfperpetuating. As soon as someone got in the queue, others felt compelled to do the same. Well before boarding time, the lines would trail out across the concourse. Regardless of how long the process took, it felt longer to those going through it.
Working with planners in United’s airport operations department, Grewal ran experiments with flights out of Phoenix and Newark and came up with a system with only two main lanes: one for the group currently boarding and one for the group that was next. To preserve the prerogative of latearriving priority passengers, a “bypass” lane was added. In late October the boarding process working group took over a gate at Chicago’s O’Hare International Airport for four weeks. They boarded single-aisle and twin-aisle planes, flights full of business travelers, and flights to leisure destinations such as Hawaii. According to Michelle Brown, Grewal’s counterpart at airport operations, “We’re clearing the gate area faster now and getting a better flow.” United is refining its boarding algorithm and plans to roll it out later this year.
The routes planes fly are also evolving. Previously, the airline relied heavily on what’s known as linear routing: a plane starting in New York would land, say, in Chicago, then travel to Denver and San Francisco and end its day in Seattle. The method maximizes the hours each aircraft is in the air full of revenuegenerating customers, but bad weather at one airport can cause delays and cancellations along numerous routes. In November, United started increasing its use of “out-and-back” routing. It also increased the amount of time budgeted for turning planes around, something it hadn’t done even though, with newer, thinner seats, its planes were carrying more passengers.
“We’re trying to find more of a balance between scheduling an airline for maximum efficiency from an asset perspective as opposed to operations,” says Andy Buchanan, managing director of international network planning. “We’re finding, I think, a better middle ground.”
Recent months have seen marked improvements in United’s performance. Its on-time and missed-connections metrics have been the best since the merger. Its rates for mishandled baggage are also sharply down, according to the latest Department of Transportation statistics. While the airline hasn’t closed the gap with industry leader Delta on those measurements, it’s at least pulled itself solidly into the middle of the pack. New planes have steadily been replacing older ones. And fliers are happier: Internal customer satisfaction scores were better in 2015 than in 2014, better in the fourth quarter of 2015 than in the third, and in December were the highest in two years.
On Jan. 7, United released an upbeat announcement, quoting the chief of cardiac surgery at Munoz’s hospital. “Given Mr. Munoz’s excellent physical condition and the rapid pace of his recovery prior to the transplant, we expect a quick recovery and a return to his duties as CEO,” he said. If Munoz has no complications from his heart transplant, he should be in the hospital for 10 days. He’ll be able to drive a car in six weeks. A full recovery can take six months or more, but patients can return to work in two or three months if all goes well. Of course, as recent years should have taught everyone at United Airlines, it’s best to plan for complications. Whether the company’s board has done so remains to be seen; it has not publicly addressed the delicate but potentially necessary issue of a successor.
The airline’s recent progress has occurred at a time of exceedingly friendly market conditions. Passengers have proved willing for the past few years to pay higher fares, and to submit, if grudgingly, to paying on top of that for checked bags, legroom, and food. Most of United’s profit of late is due to historically cheap fuel—a huge cost for airlines—an advantage that may not last. After five cost-conscious years, it will be hard for United to find any more savings to squeeze out. And its rivals continue to make gains. Delta recently passed United to become the second-largest U.S. airline by traffic. United’s competitor American, now the world’s largest airline, has brought in record profits as it works through the challenges of its own 2013 merger with US Airways.
The true test will be finding a way to grow in less forgiving times. On Jan. 11, United reported that passenger revenue has declined more than expected, partly due to the Paris terrorist attacks. “Look, this is the airline industry. We are accustomed to windows opening and closing and opening again,” says Hart. “So we are not hitting the pause button in any respect.” <BW>