Employee ownership. It was going to remake United Airlines Inc., keeping it competitive with such feisty low-cost carriers as Southwest Airlines Co. To make the strategy work, employees took pay cuts averaging 15% shortly after the buyout was finalized last July. And as promised, the company launched its new low-fare shuttle in October. But one thing hasn't gone according to plan: The labor-cost cuts are being eaten up by hikes in other expenses. In mid-November, United executives warned analysts that costs are heading up again.
Can the nation's biggest airline ever turn itself into a nimble, lower-cost operation? United says it's suffering from temporary glitches. But skeptics wonder if the airline really is dealing with its central concerns. "They have fundamental cost problems that wage cuts alone will not address," says aviation consultant Michael J. Boyd. "Within 18 months, we'll be back talking about the cost problems that are running amok at United Airlines."
HELL HUB. For now, United says its costs are likely to hit 8.93 cents per available seat-mile next year--up 3% from United's projections for 1994 costs and 7% higher than what United projected during the buyout. "You have to be disappointed," says Raymond E. Neidl, an airline analyst at Furman Selz Inc. Indeed, the new projections prompted NatWest Securities Corp. analyst Michael W. Derchin to cut his 1995 earnings-per-share estimate for United from $18.50 to $9.
In some ways, the cost increases aren't surprising. The airline's flight attendants, who never agreed to join the buyout, are scheduled to receive 4% pay raises in December and another 4% in 1995. The disastrous new Denver International Airport, one of United's hubs, will add $124 million in expenses a year--far more than expected--when it finally opens in February, 16 months behind schedule. And United management has decided to boost its advertising budget to get the word out about its new Shuttle by United service. Also heading skyward: costs for food and beverages, travel-agent commissions, and computer-reservation systems.
Granted, United's forecasts are fairly conservative. The airline anticipated a 9% rise in fuel prices next year, for example, while Paul P. Karos, an airline analyst with CS First Boston, projects only a 3.5% rise. "Nobody knows. They might be right," Karos says. Chief Financial Officer Douglas A. Hacker says United's fuel-price scenario represents a full one-third increase in expected unit costs for 1995.
The problem: Rival carriers are moving the competitive target even lower. Delta Air Lines Inc. says it's on track to lower its costs per available seat-mile to 8.6 cents by June, 1995, from 9.57 cents this year. And on Nov. 17, Southwest announced an unprecedented 10-year contract with its pilots' union that provides productivity-related bonuses and stock options instead of wage hikes during the first five years. The agreement could put Southwest's low operating costs out of reach for United and other major carriers, says Smith Barney Inc. airline analyst Vivian Lee.
"PICTURE-PERFECT." The news isn't all gloomy. United's shuttle, which operates 260 flights a day, mostly in California, has lowered the carrier's short-haul costs to 7.5 cents per available seat-mile, closer to Southwest's benchmark 7.1 cents. The shuttle is filling more than 70% of its seats and boasts an on-time performance record of 96%. Southwest, which is fighting back with fare cuts and advertising, admits that its unfilled seats have risen by several percentage points in the shuttle's markets, though it says they were up even before the shuttle's launch. "This has been a picture-perfect startup," says United CEO Gerald Greenwald, a former Chrysler Corp. exec who became the airline's captain in July.
United is still tackling costs on other fronts as well. Employee task forces are looking at ways to reduce fuel consumption and sick days. "I don't feel like there's any cost under our control that we're doing a bad job of controlling," says CFO Hacker. He says management is being blamed for problems it can't immediately fix. Yet it may be those unforeseen glitches that keep United from soaring to the heights investors had hoped for.