United Picks a Funny Time to Attract More Passengers

The airline plans to reclaim its “natural” portion of the domestic market. But first, it has to deal with that other issue.

Will United Airlines’ Customer Problems Impact Investors?

Just as United Airlines Inc. grapples with the fallout from a customer service debacle, the carrier is embarking on a growth spurt—an effort to regain what its president dubs “natural market share” after years of decisions that ceded traffic to rivals.

In the second quarter, United plans to boost domestic growth by as much as 5.5 percent as its mainline flights expand and regional jets disappear on marquee business routes such as Chicago-Washington and Newark-Atlanta. The switch to larger jets for many destinations is meant to show that United has a superior product while making it more competitive with domestic rivals. United also wants to command higher shares at its hubs, much the way its competitors do in cities such as Atlanta, Dallas-Fort Worth, Charlotte, N.C., and Detroit.

“This is not trying to go invade someone’s hub. This is about restoring United to where it should have been,” President Scott Kirby told analysts Tuesday, seeking to assure them that turf battles and fare wars aren’t in the offing.

The timing is a bit awkward, given the ferocious, global denunciations the airline faced last week over that incident in Chicago. The carrier called airport security to an O’Hare International Airport gate on April 9 when Dr. David Dao declined to relinquish his seat to an airline employee. Dao suffered a concussion, broken nose, and other injuries when security personnel dragged him from the plane. His lawyers have said he plans to sue.

United executives said on Tuesday they have fielded “appropriate questions and concerns” from corporate customers and are reviewing the assault on the passenger, as well as new policies aimed at preventing a recurrence. Naturally, that review will revive news of the incident and bring fresh attention to it when United makes the report public later this month.

Rare domestic growth

The planned domestic growth at United, while modest relative to low-cost carriers, is rare in this era, in which four huge airlines have carved up most of the U.S. market. American Airlines Group Inc. plans systemwide, second-quarter growth of 1 percent, while Delta Air Lines Inc. plans growth of 1 percent or less, and possibly none. Domestically, Southwest Airlines Co. has targeted 2.5 percent growth for the full year.

The United hub growth strategy, begun under Kirby, a former American Airlines president, is a marked reversal from United’s network approach following its 2010 merger with Continental. Under former Chief Executive Officer Jeff Smisek, the airline turned to regional flying and shrank domestically in response to weak financial returns relative to those of the industry.

“United did a lot of cumulative actions in the past three or four years, which caused it to lose its natural share, and which hurt its financials,” Kirby said to the analysts, adding: “And you guys used to get on this earnings call and beat them up.” Wall Street’s proposed solution of cutting capacity just made things worse, he said.

The new strategy is also driven by the tight supply of pilots in the regional jet industry. “Everyone knows that United never should have been flying regional jets in markets like Chicago to Washington National or New York to Atlanta,” Kirby said. He cited United’s 1,200 daily seats on six mainline flights between Atlanta and Newark, restored from the 300 it flew with 50-seat regional jets on the route for several years. Amid United’s prior downsizing, Delta retained its 1,800 daily seats on a dozen mainline flights between those cities, Kirby said, helping that airline boost the 60 percent market share it enjoyed as United’s 40 percent share slipped. United is now aiming to return to the “natural” level it previously enjoyed.

Ticked off

Investors remain skeptical that United’s new flying will work in tandem with higher profits—shares in parent United Continental Holdings Inc. dropped 4 percent on Tuesday. Also unclear: Will the rest of the industry stand pat as United builds greater market share, even if it’s focused on the carrier’s own hubs?

“There is no 'natural share,' everything is market share,” said George Ferguson, an aerospace and defense analyst at Bloomberg Intelligence. “When you’re expanding, you’re trying to take market share. Delta is going to be ticked.” He said United is “talking right at business travel, and when you’re talking about business travel, there’s going to be a fight to keep it.”

Cowen & Co. analyst Helane Becker echoed that sentiment in a client note on Tuesday: “So far there hasn’t been a competitive response, but these are high-value business travelers we are speaking about. We do not believe this strategy will be ignored by the other airlines.”

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