How Will United Continental’s Initiatives To Promote Operational Efficiency Contribute To Its Earnings?

January 9th, 2017 by Trefis Team

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United Airlines Holdings

As a part of its five-year plan, United Continental (NYSE:UAL) CEO Oscar Munoz has laid down a comprehensive path to improve the carrier’s long-term earnings through a number of strategic initiatives, aimed at commercial enhancements, and improving cost, and operational efficiency. The new strategy is expected to generate $4.8 billion incremental earnings by 2020 for United. In earlier articles we have discussed United’s plan to optimize its network potential, by shifting the focus back to domestic routes (adding $1.45 billion to the company’s earnings by 2020); re-fleeting and upgauging initiatives to be undertaken to promote efficiency; and the benefits to be accrued from segmentation and fee bundling.

In this article, we talk about some of the operational initiatives the company plans to undertake in order to offset the recent pay hikes it has granted its employees and pilots.

Despite weakness in its top line, United Continental managed to reign in its fuel and non-fuel expenses. Furthermore, the company has showcased a significant improvement in reliability. For instance, the mishandled bag ratio has gone down, the number of canceled flights has consistently decreased, and United’s on-time arrival and departure performance has shown sustained improvement. However, going forward, the company expects its costs, including fuel, to increase slightly owing to the recently ratified labor deals and rising crude oil prices.

In order to offset the affect of rising wages and fuel costs, the company sees opportunity to improve operational efficiency on the following metrics:

Aircraft Turnaround Time

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Aircraft turnaround time is defined as the time required to unload an airplane after its arrival at the gate and to prepare it for departure again. Given the exorbitant airport charges and rising fuel charges levied on airlines, the aircraft turnaround time becomes important for the company to cut costs. By reducing its turnaround time to 10 minutes, the low cost carrier, Southwest Airlines, managed to turnaround its fortunes. Even now, Southwest’s turnaround time is the lowest in the industry at approximately 25 minutes. United aims to cut its turnaround time by providing more resources to arriving aircraft, such that, passengers and baggage are unloaded, the plane is cleaned and restocked, and the new passengers and bags are boarded, all in the set time limit.

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Aircraft Maintenance Process

United’s maintenance process is far behind its peers. The maintenance cost per seat for the carrier is second only to American Airlines.

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On the other hand, Delta has a world class maintenance facility in Atlanta that has ensured that the carrier’s maintenance costs are the lowest in the industry. Consequently, United is trying to refine its maintenance process through a three pronged strategy, which includes redesigning maintenance programs, improving the supply chain, and modifying reliability.

Cancellations and Long Delays

Flight delays and cancellations not only cause inconvenience to passengers, but also cost the carriers billions of dollars. The Federal Aviation Administration (FAA) considers a flight to be delayed when it is 15 minutes later than its scheduled time, while a cancellation occurs when the airline does not operate the flight at all for a certain reason.

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By resulting in increased travel time and increased expenses on food and lodging, they cause stress among passengers. Further, they disrupt the purpose of air travel — rapid, affordable and safe — and make the passengers distrust airlines. On the other hand, airlines suffer from extra crew costs, costs associated with accommodating disrupted passengers, and aircraft re-positioning, as airline fleet and crew schedules are largely based on the scheduled times. To reduce these costs, United is working on improving fleet health and improve the durability of the flight schedule.

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Focus on Customers

United has put in place a new organization structure which increases the focus on customers. A new position of Chief Customer officer has been introduced, who would be responsible for ensuring operational reliability and customer experience. Furthermore, the company wants to align all its policies and procedures such that they enhance customer experience.

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Accretion To Earnings

United expects its initiatives to promote operational efficiency to become accretive to earnings in 2016 itself. The addition to earnings from these initiatives is as follows:
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Have more questions about United Continental (NYSE:UAL)? See the links below:

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for United Continental

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