United Airlines CEO Scott Kirby, speaking at the Alliance Bernstein 37th Annual Strategic Decisions Conference on Thursday, explained his cost-cutting vision as eliminating fat from management and unnecessary processes without touching product investment.
He offered that they will “save $2 billion in expense, not a single penny is going to come from customer product, in fact we’re going to spend more on those things” and noted upcoming product announcements will be coming.
Taking Full Advantage Of The Pandemic
In some ways cutting billions in costs without any impact to the product is a free lunch vision, suggesting that the airline builds up a lot of costs over time and it’s tough to eliminate them.
On the other hand it takes a pandemic to solve for them. It’s certainly been my more modest experience that organizations develop a sclerosis, and there’s a go along get along passivity towards projects that may have begun as experiments but continue because there are constituencies in place that value them rather than because of the value they create.
As Kirby observed later in the discussion many unprofitable routes would have been tough to cut in the Before Times because people liked them and there were employees emotionally attached to them, but now all you need to do is not restart them.
That’s all well and good and crises can be valuable for an organization to go through when they force focus and a fresh start. You wouldn’t wish them on yourself, but you can recognize you’re better off on the other end for having gone through them.
Doubling MileagePlus Earnings Could Be Bad For Customers
One area where I think Kirby is going to have to diverge from his view of cutting costs without affecting the customer is the MileagePlus program. He revealed in the discussion that “spend on airline credit cards [overall is] now up..[and] credit card spend [is] back to over 2019 levels.”
Credit card spend drives the financial performance of MileagePlus, which prior to 2020 lagged American and Delta. Just before the pandemic United inked an extension with Chase that drives more money to the airline’s bottom line. However that revenue growth isn’t enough.
Instead Kirby says the “goal I’ve given that team is to double EBITDA of that business…[in] four years.” And roughly speaking to double earnings they need to double co-brand cardmembers or cut MileagePlus costs. And doubling is tough – it represents 19% annualized growth from a baseline that already includes the new economics of the Chase co-brand deal.
Analysts and United execs themselves know that their smaller network and the dynamics of their deal w/ Chase leave them a less lucrative credit card deal. Getting better revenue revenue is going to happen; doubling that revenue and the margins on it is unlikely and that reality is tied to UAL’s international heavy and business travel heavy network which will recover more slowly even as competition is growing more in United’s top markets than for American or Delta.
As an international business traveler UA shot themselves in the foot by upping the cost and complexity of becoming 1K. Just prior to pandemic I switched to buying the best price or most convenient premium economy or business class seat irrespective of airline. Now that I am getting back on the road again I am evaluating my strategy but sticking to one program does not seem worth it.
@ Gary — I hear all of this talk of credit card spending exceeding 2019, and I would love to know the drivers behind in — increased borrowing, high inflation, less cash transactions,, transient stimulus money passing from the Fed to Home Depot, or all of the above?
So doubling MP revenue seems to translate as selling more miles while furthering inflating the cost of redemption of those miles. Getting ready to see Delta-esque redemption numbers to get a flight.
@Gene – I think Larry Summers has drawn the graphs, you combine fed stimulus + $6 trillion in Covid relief packages you’re more than making up for economic shortfall from the pandemic, consumers have cash whether it’s come via stimmies, pandemic unemployment, PPP, or any of the other myriad programs.
I’m trying to recall when spending on a UA card quit making sense for me. Was it 2014 or 2015? Or earlier?
Cue The Beatles’ “The Fool on the Hill”.
Oh no! Translation of UA statement:
We want to sell buku more miles to Chase to make us loads of money. In order to do this we will have to massively devalue the benefits of the program and members will suffer…but we do not care. Go United!
(More) Redemption devaluations sure to be coming soon. Burn baby burn.
What are they smoking ?
They still charge change fees for award redeposit and 32000 miles for a one way award ticket for domestic awards
I suppose 12;500 is just fiction
Avoid them like the plague and that’s just the short story
Miles have become fools gold. Lucky for UA and the other airlines, I don’t think a lot of people pay particular attention to it. It’s the frog in pot of water deal.
Ease Chase 5/24 for UA cards and I’d pick up a couple (and then cancel after a year).
Remember the customer rules, still charging a annual credit card fee with deminishing benefits represents a recipe for failing business model.
The message? BURN your miles!!! Do it NOW!
@Too Many +1
In no possible way is this going to work out well for the customer. Maybe Kirby thinks that driving customers away from United cards to cash back cards is prudent but I’m gonna go with no. Cue the Bad Idea Jeans commercial.
They aren’t quite at the 1 CPM value of DL (given the recent availability of Saver space on UA metal, plus *A redemption) but that clearly is the long-term goal
I have spent more this year on a UA card only because it offered 5 miles per dollar on $1500 per quarter. Then LH deleted the only feasible connection on my confirmed award trip and refused to help in any way to repair the destruction of my trip booked many months ago. This despite the availability of suitable flights for cash but not miles. UA refused to ask LH on my behalf. Covid does not excuse this degree of mistreatment of customers.
I will avoid accumulating any large UA balance until this unacceptable treatment by UA’s primary European partner improves. At 5 miles per dollar, I will use a UA card. Below that, I won’t.
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I work at the Memphis Tn Airport United seem to be doing everything except give us at their Memphis Station a raise…THE JOB IS GETTING DONE !!!
First class domestic ticket and no access to United Club??? Will not fly USL again unless forced to do so!!