United Airlines’ Jeff Smisek – Vision And Paranoia Unified

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Today I came across an interesting interview of the British travel industry news outlet BBT (access here) with United Airlines CEO Jeff Smisek.

United Smisek

I have read a bunch of interviews with Mr Smisek before and even though I think that United Airlines in it’s current shape is an utter disaster, some of his ideas indeed made sense.

This interview is no exception. On one hand he makes a few very good points and then he turns around and the things he says sound absolutely crazy. Not as crazy though as the recent comments of his Delta Airlines counterpart Richard Anderson I have to admit. Do you recollect Anderson’s remarks linking the ME3 airlines to 9/11? (Consult the IBT article here to refresh your memory).

But let’s get back to this. The interview with Smisek is broad: Route expansion, Distribution, Fleet Planning, Modernization and then of course Competition / Open Skies.

United operates 26 UK flights a day, of which 17 fly out of Heathrow. He is fairly sanguine about the highly competitive transatlantic market, and the challenges of capacity at Heathrow, where he’s competing with the joint ventures of Virgin-Delta and BA-American – United’s transatlantic JV is with Lufthansa. …

He [Smisek] agrees the routes from Heathrow to New York and United’s other US hubs are “fiercely competitive”, but on the other hand they’re the routes with a lot of high-yield business traffic on them – “That’s what makes them so competitive – people go where the money is.” People want to go to Heathrow, he says, not Gatwick, citing the “huge amount of connectivity” between LHR and United’s Newark hub.

The JFK-London route has always been the cash cow for airlines due to the population density of both cities and the fact that both are global, financial business hubs. Though I sometimes wonder how in the world all these daily flights can still make money. United, Delta, American, Virgin, BA just to name the largest carriers. Of course we all remember when the Global Financial Crisis hit back in 2008, these routes were bleeding dramatically. Anyway, Smisek is right. People don’t want to go to London-Gatwick and there is good money to be made so UA should go for it and explore an expansion.

The interview goes on to aircraft efficiencies and route expansion.

China is an important market for United, says Smisek – and what’s helping the airline expand there is new aircraft technology. “United is the largest US carrier to China by far, twice our competitors. We recently started San Francisco to Chengdu. That’s a so-called secondary city – secondary cities in China have 8-10 million people – and we’re able to do this because of the efficiency of the B787, and take that commercial risk. Non-stop into city that’s never had service from US carrier. If it works, it will open up a number of other secondary markets.

He adds that over time B777-300ERs will gradually replace the airline’s B747s, and while the B777X is not on order, it is a “potential product for us.”

One thing he doesn’t like is international first class. “It’s a money loser, and we will be eliminating it over time. For example the 767s that have it today, as they get retrofitted you will not see it reappear.

These ‘secondary markets’ in China are huge as the example outlines. What China considers a small secondary city is in our eyes a Megacity. A metropolis with several million inhabitants and (due to the rising economy and strong Chinese Yuan) huge purchasing power. One can see why the race is on for these destinations and why suitable aircraft are important.

What is very interesting is that Smisek openly talks about getting rid of International First Class, calling it a money loser that will be eliminated over time. I agree that the airline would be better off just putting additional 12-18 Business Class seats into the cabin instead of holding onto the spacious First Class seats that are likely filled with upgrades, mileage awards, staff (!!) and maybe the occasional paid ticket. Part of this problem however is that the product quality is at best a Business Plus and compared to some other carriers even worse than their Business Class. A friend of mine recently traveled in United Global First to Japan and they did not have Menu’s. Instead the passengers were handed bad copies, stapled together. Seriously, who would pay for that?

And now ladies and gentlemen lets move to the rather strange things Mr Smisek came up with. The first matter deals with the Airbus A380.

One aircraft he won’t be buying is the A380. “That is a product for state-subsidised airlines, or airlines that have it and wish they didn’t,” Mr. Smisek says.

Why would United even talk about the A380 NOW, after all these years? It’s no secret that the Airbus A380 is a model that is phasing out. Even Airbus admitted that not too long ago (see HBJ article here). It was a product of it’s time and this time is gradually running out. There are plenty of Airlines who are not state subsidized and who operate the A380 successfully. Singapore Airlines for example. Lufthansa is another carrier that has a large fleet of A380 (though it is no secret either they had to scramble their routes a few times after running into regulatory issues for example in China and India). Emirates is still excited about the A380 as can be seen in the article referenced above. And with the mention of Emirates lets swing to Mr Smisek’s apparent personal pet peeve: State subsidized Airlines (or what he accused to be such).

Competition doesn’t phase Smisek, but what does get his goat at the moment is what he calls “state-subsidised airlines” taking market share. Asking him about the current Open Skies dispute between the ‘big-three’ US airlines and the ‘big three’ Gulf carriers is like lighting the blue touchpaper. …

The treaties with the UAE and Qatar have been “terribly abused” by those governments, he says. The treaties are premised on fair competition, and while there are other state-owned airlines with which he has no problem, these two governments “have used massive subsidies” that he says are twice the size of those reported by the World Trade Organisation in the Airbus-Boeing dispute. …

“These countries have no home markets at all, they rely entirely on taking traffic from others, through subsidies – whether subsidised pricing, product levels or marketing.” He adds that beyond the “indisputable, very conservative” figure of $42 billion over the past 10 years, “I suspect there are billions of additional dollars of additional subsidies buried in interested party transactions.”  United has joined rivals Delta and American Airlines to form the Partnership for Open & Fair Skies, a coalition lobbying the US government on the issue. …

Here he joins the club with Mr Anderson (Delta), though not in the same lunatic manner. While there are for sure certain elements in the corporate structure of the ME3 carriers that lets these companies profit from a certain financial freedom, the arguments that the U.S. carriers repeatedly come up with are basically “These carriers don’t need to be profitable; The carriers get capital injections by the government; The airlines are individually owned (by wealthy sheiks) and get ‘propped up’ from time to time; The carriers don’t have to pay operating, variable costs such as fuel and airport facility fees.” Again, this might be true to a limited extent but definitely not on the level these CEO’s like Mr Smisek allege.

The bottom line is: Their planes are full, the passengers are largely happy with what is being offered and the times of dumping prices are definitely over. These airlines make money, no matter of Smisek & Co. like it or not.

When confronted with the argument that U.S. carriers themselves benefited from a form of subsidy, namely the Chapter 11 Bankruptcy Protection, Smisek goes into the defensive.

Etihad has cited research claiming the US ‘big three’ received benefits worth $70 billion since 2000 – the majority of this in the form of Chapter 11 bankruptcy protection. “That’s an absurd argument,” Smisek replies. “Bankruptcy protection is not a subsidy whatsoever. The people who get hurt in bankruptcy are creditors and shareholders. If they want to talk about subsidies, we welcome that. Bring it on, we’ll win that argument all day long.”

What is your point Mr. Smisek? Just because the money doesn’t come outright from the government but instead the government allows the airline to stiff their creditors, shareholder and pensioners you absolve yourself from the argument? Ok, let’s not call it subsidy and instead use the term ‘government assistance’. The principle is the same and the mechanism even worse. There is nothing else to say about this because this line of argument is just sad from a man of Mr Smisek’s background (after all, he graduated from Harvard Law with a JD!).

Concluding the interview, Mr Smisek notes the value of distribution channels for United. Supposedly the United App is doing quiet well but after my recent experiences with this application I really can’t see why.

He also elaborates on his approach to GDS reservation systems and travel agents, a distribution channel which United’s Joint Venture partner Lufthansa recently levied with a 16 EUR fee per booking, effectively penalizing customers that do not book direct with the airline.

“Philosophically I don’t have opposition to GDSs or travel agents. If they’re delivering value, they should be compensated. But when they demand more compensation than the value they deliver, we have to come to a more commercially reasonable solution.”

I guess that is fair enough. The customer can pick which distribution channel he prefers and if the services of a travel agency are required (for example to book a more complicated routing) I see nothing wrong with the customer paying an additional fee to the agency to offset these costs. Of course lets not be blind, the bottom line is penny pinching by the airlines.

Conclusion

I’m always interested in what these airline CEO’s have to say to see what direction the carriers might take as far as their products and services are concerned. The fact that UA wants to do away with First Class was an eye opener, I guess many of these lower grade carriers (quality wise) could do the same thing as the difference to Business is marginal. I can’t see an airline like Lufthansa, Singapore Airlines or British Airways getting away with it.

As far as the debate against Open Skies and the ME3 goes, again I find that line of argument just sad and unworthy of educated individuals. If you want to attack these carriers on their appalling record of how they treat their employees and the lack of customer service in some instances go ahead but on the economic stage there is very little leeway for United & Co. to lobby. They wiped their slate clean per Chapter 11 several times and now have the audacity to come and cry foul.

The whole interview shows how out of touch United still is in certain instances and the fish always stinks from the head! If United employees hear their CEO say such things publicly, how can I expect them to have a better and more reasonable approach to service culture?

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