Glenn Tilton's Plan to "Transform" United

The airline's chairman and CEO explains why billions more in costs must be cut and offers some possibilities for getting there

Few corporate chieftains have had a harder fourth quarter than Glenn Tilton. Formerly Vice-Chairman of ChevronTexaco (CVX ), Tilton became chairman and CEO of UAL Corp. (UAL ) and its money-losing United Airlines unit last Labor Day. He knew next to nothing about airlines, but he immediately got to work with UAL's unions and assembled a cost-cutting plan that the company calculated would lower labor expenses by almost $1 billion a year. Though that was well short of his original goal of $1.5 billion, Tilton believed it would be enough to secure $1.8 billion in government-guaranteed loans and allow the world's No. 2 airline to avert a bankruptcy.

It was not to be. Even before the unions had finished voting on their givebacks, the federal Air Transportation Stabilization Board (ATSB) dismissed UAL's application on Dec. 4, saying it was based on unreasonable assumptions. On Dec. 9, with $920 million in past-due bills, UAL sought bankruptcy protection. It's the biggest Chapter 11 filing in U.S. aviation history and the sixth-largest ever, when measured by assets (see BW Online, 12/13/02, "How to Keep United Flying").

UAL's predicament predates Tilton. The Elk Grove Township (Ill.) airline was profitable in only one quarter of 2000 and has steadily lost money, thanks to a slowing economy and low-fare competition from the likes of Southwest Airlines (LUV ) and Internet travel sites that make finding the cheapest flights easy.

Nonetheless, it's now Tilton's job to fix UAL, and he doesn't have much time. Its new lenders have warned that unless he comes up with $300 million more in savings within the next few months, they plan to cut off funding, which could force the company into liquidation.

Since UAL's bankruptcy filing in Chicago, Tilton, 54, has been making the rounds of United's hub airports to talk with employees. While chomping on a Big Mac at Denver International Airport, he spoke by phone with BusinessWeek Senior Correspondent Michael Arndt about his plans for the airline. An edited transcript of their conversation follows:

Q: One of the issues that has to top your to-do list is bringing down your extraordinarily high labor costs so UAL can emerge from bankruptcy and have a future. How realistic is that?


I think it's very realistic. The best way to look at to put these cuts in context. In the 90-day discussions I had with unions, we were creating an application to stabilize the we could then work together on transformation.

The feedback we got upon ultimate rejection from the ATSB was: "We don't think this plan on its face is sufficiently resilient and durable to succeed in the event that the revenue environment gets worse, or in the event that competition becomes more intense, or in the event that you have any execution risks whatsoever and something just goes wrong." But that really wasn't what we were solving for.

Q: But labor is one of the chief things that keep United from being competitive. You were able to come up with $1 billion a year, on average, in labor savings, but your own filing says that to match Continental's labor costs, you need $2 billion a year in savings.


It will be significantly more than $1 billion, and let me give you a data point. When I arrived on the job, the previous management had said the company would need $9 billion in labor savings or about $1.5 billion a year. That's a good number, because it gets you close to the number we're talking about.

We're going to take a different process of talking to our labor coalition leaders.... By that I mean we're not going to be traditionally negotiating -- where the issue is only wages. We're going to be focusing on productivity and efficiency. We're not going to start with the question you asked me: "How much?" Instead, we're asking: "What for? What will it take for it to be successful in the new reality of the airline industry in the United States?"

Q: Let's go beyond labor concessions then and talk about structure. Is the right structure for United still the hub-and-spoke network?


The mainline, which you refer to as hub-and-spoke, is going to have to be competitive with the majors -- Continental (CAL ), Northwest (NWAC ), Delta (DAL ), and American (AMR ). We all offer something that I think is going to continue to have value, and that's connectivity. But we're going to have to trim [the mainline] so it can compete.

Q: How do you trim it -- by cutting more routes and frequency of flights?


No, no, no. That was a poor choice of words by me. What I meant is we're going to have to make its cost structure more competitive. I want to be able to protect my routes, my connectivity. But we want to do so by being cost-competitive, so I can expand the customer base of the mainline and not restrict it only to those who can afford to pay a premium price or a business-fare. I also want to make certain I never forget that business travel is going to come back with the rest of the economy, and when the business travelers come back, I want to be there for them, too.

That said, there are competitors, such as Southwest, that are attacking 70% of United's route structure that do not seem to need connectivity. Those competitors fly point-to-point for the budget-conscious business traveler and the leisure traveler. And they continue to erode my ability to attract people to mid-cabin and back-cabin on the mainline.

Q: And how do you compete with them?


If I can create a new product, which could be like our old Shuttle by United, or a facsimile of it, United will have two opportunities to compete: One by offering up a cost-competitive, value-for-money mainline, and the other by offering a point-to-point airline that resembles but is going to be significantly different from Shuttle by United.

Q: As I recall, Shuttle by United did very well in its first years in the 1990s in California, but came undone as labor brought in work rules that raised its costs and made it unprofitable.


I think that's perfectly well said, but the reasons are more complex. What happened is we lost sight of the distinctions between the two offerings to the public, and both labor and management brought Shuttle by United closer and closer to the mainline until the value proposition offered up to the public was indistinguishable.

Q: So this new discount carrier would operate like Southwest Airlines with just one type of aircraft, correct?


Right. The big destroyer of value in any strategy associated with a point-to-point carrier is complexity. Everything has to be simplified, including your aircraft fleet and your fare structure.

Q: And the reason for not just transforming United into this second type of carrier is that there are people who need the hub-and-spoke system and will be willing to pay some premium?


Not a huge premium, but yes. Think about the business traveler who books a journey in Beijing, passes through O'Hare Airport, and wants to go to San Antonio. He can book that on one ticket. That's [the] connectivity our hub-and-spoke system offers up.

Q: UAL has 83,000 employees today. What payroll target are you shooting for?


The question is presented to me backwards.... After we create the business model, we're going to tailor the right number of people to that model.

Q: But if you come in with a different business model that's much more efficient, you'll obviously need fewer people.


I'd be hard-pressed to come to the conclusion that we're going to need more people.

Q: UAL's employee stock ownership plan, which gave pilots and other employees control of the airline, is widely blamed for the company's mess. What happens to the ESOP?


The [bankruptcy] filing did not change the legal corporate structure. The capital structure of the company is going to be a matter for the bankruptcy court and the various constituencies to solve. [It] will have to include...a variety of prospective equity participants who aren't there today.

There's a whole suite of people who have expressed interest, including Texas Pacific Group and Singapore Airlines (SPAAF ), which as you know, is a member of our global Star Alliance. We will, in the course of the filing, talk to all of these parties.

Q: Some of your proposed business model sounds like "out-of-the-box thinking." But much of this doesn't seem to be all that novel. Should you be more radical, or is this just a matter that United is basically O.K.?


We need to be able to put ourselves in a position where we restructure the company, restore the competitiveness of our cost structure, and then, as the business continues to change, put ourselves in a flexible position so we can change with it. One thing United is not going to be able to do is to reject its organization. It's going to be able to transform its organization, but it can't go back to a blank sheet of paper.

Edited by Patricia O'Connell

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