A To-Do List for United's Mr. Fix-It
By Michael Arndt
Ten years ago, John W. Creighton Jr. saved Weyerhaeuser, the timber and paper-products giant, which then lagged rivals in profitability and share price appreciation. Creighton -- who became chief executive of Weyerhaeuser in 1991 -- sold off anything peripheral or rutted in a low-margin market. It took four years, but he turned the company into a leader again.
Now Creighton, a director who on Oct. 28 was named chairman and CEO of UAL, the corporate parent of United Airlines, has another troubled giant to rescue. But this time around, he has no time to lose. Since the September 11 terrorist attacks, United has grounded 31% of its flights and furloughed 20,000 employees. Yet it is still burning $20 million in cash a day and is expected to lose $1.8 billion this year.
The situation is so dire that Creighton's predecessor, James E. Goodwin, warned in a mid-October letter to employees that "United will perish sometime next year" unless the hemorrhaging ends. Goodwin's unusual candor cost him his job, but he may well be right. "Could the company file for bankruptcy? Yes, it could," says Brian Campbell, president at consultancy Campbell-Hill Aviation Group. "[UAL] got hit like a ton of bricks."
So does Creighton, 69, have a shot at keeping United aloft? Its problems are deep-rooted -- not least because of its extremely potent labor force. Unions own 55% of UAL's stock and hold 2 of 11 seats on the board -- one reason the carrier has labor costs among the highest in the industry. The result: a frequently intransigent culture that has defeated the reforms of half-a-dozen CEOs. And Creighton can do little to alter United's treacherous environment. Only a rebounding economy and an end to terrorism will fill planes again.
But unlike the aloof Goodwin, Creighton has the confidence of United's unions. A lawyer and accountant who oversaw a heavily unionized workforce at Weyerhaeuser, Creighton was recommended for the job by R. Thomas Buffenbarger, who heads the International Association of Machinists. "The key is the unions," says ABN Amro analyst Raymond F. Neidl. "They have been obstinate." To change that dynamic, here is where Creighton must start:
Pare labor costs. Creighton must persuade the airline's richly paid workers to take pay cuts that mirror its newly diminished revenues. Goodwin sanctioned record pay hikes; now, Creighton should open up the books to union reps and more clearly explain -- with the help of neutral outside accountants chosen by both sides, if needed -- what will happen if labor rates do not fall.
Restore morale. If rank-and-file workers balk, Creighton could help sell the belt-tightening by unilaterally reducing management salaries. He might even set an example himself by forgoing a salary until UAL is profitable again. He should also clean house. United's management ranks are exceptionally thin, and its top execs have lost the trust of employees and investors. Creighton should quickly bring in a half-dozen new leaders from outside the industry and groom a successor.
Boost service. Improved morale will help, but to gain a bigger share of passengers still flying, Creighton should borrow a move from Continental Airlines. In the mid-1990s, managers there began awarding bonuses based on on-time performance and baggage handling goals. The resulting improvements in service reduced costs, won back customers -- and made workers happier. And there's no reason United -- like rival Northwest Airlines -- can't boost X-ray screening or other safety measures on its own. Increasing passenger confidence may be the most effective airline marketing nowadays.
And should reason fail? If UAL continues to bleed red ink, some analysts say bankruptcy -- which would allow it to abrogate its union contracts -- may be its only hope. Given the risks, such a move would clearly be a last resort. But Creighton should not forget that it remains in the tool kit.
Correspondent Arndt covers airlines from Chicago