Dear Mr. Smisek - It is about the Starbucks Coffee....

Dear Readers -

Thank you all for your support and growing interest in what I write for this blog.  As of yesterday, this blog has been read over 30,000 times.  Please keep sharing and get the word out.  It has been nice seeing analysts and those in the media calling for a change in management at United.  I will again ask all of you that have shares to please make sure to vote "Against" the re-election of the Board Members, including Jeff Smisek, and vote "Against" approving the executive compensation plan.

Your Proxy notices will be arriving in the next week either my mail or e-mail. I urge you all to cast your vote on line or by phone.  If you request the Proxy that allows you to vote at the annual meeting, you must be in attendance or you forfeit your chance to vote.  Even if you vote on-line or by phone in advance of the meeting, that does not keep you from being able to attend the meeting in Chicago.  Rally together your flying partners and friends who own shares and urge them to be there.  There has never been a better time to make a very public stand that will put pressure on this Board of Directors.

I hope you enjoy this new post.  Thank you so very much for keeping the Skies Friendly!

                                                                                                                                  

On Thursday of this last week, April 24, United Continental Holdings, Inc. released their earnings statement for the first quarter ending March 31, 2014.  They reported a loss of $609 million which includes one-time and special charges.  Much of the blame for the poor showing was placed on the severe winter weather that gripped the Midwest, Northeast and Atlantic states.  United canceled over 35,000 flights in February, all but 5,000 of those flights were with regional carriers operating under the United Express name.

I was not going to listen to the webcast on Thursday morning.  After I read the earnings release, I figured that the excuses that would be offered in the webcast would be the same excuses I heard at the meeting I had with United management the week before.  I did listen though, and I am so very glad I did.  How do the young people put it now? - oh, I know, Jeff and his "Team" got schooled.

It was only the day before that Delta, American and Southwest all reported record earnings for what is a normally slow quarter for the airlines.  They too were affected by the winter weather, yet they somehow managed to keep it together.  Jeff told us that United was more at risk because of airport closures in Chicago, Cleveland, Newark and Washington D.C..  Come on Jeff, Delta has hubs in Minneapolis, Detroit and New York, but they were able to plan and respond in a better fashion. 

Revenue is where Jeff and his "Team" really felt the pressure.  Placing all the blame on the cancellations, United's year over year passenger revenue number went down 2.3%.  Yield and PRASM numbers went down 2%.  There was no real change in capacity, so what all this tells us is that United does not have a good product to sell.  United could not get their revenues up because there was no demand to push an increase.  United flew 455,000 few passengers than they did in the first quarter of 2013.  All of this supports what so many of us have been saying, Jeff and his "Team" are managing to chase customers away.

I took a look at Delta's performance, despite having 17,000 cancellations during the quarter, they managed to show a year over year revenue increase of 5%.  They increased capacity by 2% (customers defecting from United were going to need seats), yet managed to get their PRASM rate up 3%.  Average Load factor was up to almost 83%.  Revenue Passenger Miles, this is the number of miles flown per paying passenger, went up 4%.  

Comparing the two carriers - here is how key unit revenue and expense numbers measures look:

                                         United          Delta                % Difference     

      (1)  PRASM (cents)          12.91          14.24           (9.34%) unfavorable  

      (2)  Yield (cents)            15.92          17.21           (7.50%) unfavorable

      (3)  CASM (cents)            15.81         15.39            2.73%   unfavorable

      (1) - PRASM = Passenger Revenue per Available Seat Mile.

      (2) - Yield = Passenger Revenue per actual Revenue Passenger Miles flow.

      (3) -  CASM = Operatings Costs per Available Seat Mile.

Delta and United are almost the same size, serve almost the same numbers of cities and target the same customer base.  These numbers should be much closer.  

I also took a look at the pre-merger operations for the combined United/Continental carriers, in the first quarter of 2010, against their performance now, and here is what I found:                                        

                                         1Q/2014       1Q/2010                 % Difference        

      (1)  PRASM (cents)          12.91            12.47              3.53%  (.9% annualized)  

      (2)  Yield (cents)            15.92            13.50             17.93% (4.2% annualized)

      (3)  CASM (cents)            15.81            12.37             27.81% (6.3% annualized)

It can be argued that a big part of the increase in costs is due to the long overdue raises to many of the many employees as Joint and Tentative Collective Bargaining Agreements were put into place.  However, declining demand for the product has kept United from seeing the revenue growth that Delta and other carriers are realizing.  

As Jeff and his "Team" said in the webcast, "this quarter is definitely not where we should be."  Jeff went further by saying that there are still "structural issues (tied to the merger) that my Team has to work out."  I noticed that Jeff never took responsibility for himself, it was always his "Team."  I had to laugh when one analyst asked the "Team" - "what excuse will you have for us next time?"  Yeah Jeff, you got schooled.

As I listened to this webcast I felt so vindicated that everything that I have been trying to say was being confirmed by analysts and others out there that do have a voice.  As a shareholder I was certainly disappointed to see what happened to the stock price after this webcast.  The day before the announcement, UAL stock shot up after the glowing announcements put out by Delta, American and Southwest.  Everyone thought that United too would report that actual numbers were better than what was expected.  Those numbers were worse.  At the opening of trading on Thursday, UAL stock dropped almost 6% right away.  As I was listening to the web cast open in one "window" on my computer, I was tracking the trading in UAL stock in the other.  In that one hour, UAL stock dropped another 5% points and by the end of the conference call, the stock was 12% down from the day before.  On Friday, UAL stock went down another 9%. 

Right away on Facebook and different sites, people were posting quotes from analysts weighing in that day.  I listened to both CNBC and Bloomberg news, and those commentators were all in disbelief that Jeff and his "Team" thought they could put all the blame on the weather.  One CNBC analyst even commented at how fragmented the operation still seems to be, to quote, "its been three years, they should be operating as one airline by now."  Jeff and his "Team" had nowhere to hide on Thursday.

When questioned by analysts about revenues, James Compton Vice Chairman, and the number 2 man, conceded there was work to do.  He said they were going to improve yield management.  That one kind of took me by surprise, Continental was supposed to have been the darling in this area and what about SHARES, aren't the same algorithms that were programmed in Apollo being used by the SHARES system?  I think there is something here.   Apollo was a leader in computer reservations systems for the airline and travel industry.  Automated yield management played a big part in how the system controlled inventories and fares.  It could track demand and make adjustments right away to optimize the amount someone was willing to pay for their seat at the time of booking.  The Apollo system engineers had years of experience in fine tuning demand and supply trends and having the system control inventory to optimize revenue.  Mr. Compton says they have gone back to reduce the number of available seats for lower advance purchase fares, and are taking a look at pricing through the Denver, Houston and Tokyo hubs.  Is SHARES telling them to do that, or do they have to make the determination on their own?  If what I suspect is right, SHARES is not as sophisticated as Apollo to effectively monitor and measure demand and respond accordingly.  United will never be a revenue leader if they cannot manage fares and inventory in tandem and more efficiently. 

So what is going so wrong at United? 

Jeff - it's about the Starbucks coffee, not so much about the actual coffee served, but it is about what that change represented.  Right after the merger you promptly got yourself on the safety videos and arrogantly promised that United customers were going to like the changes that were coming.  One of those first changes was to discontinue serving Starbucks coffee and then replace it with some swill that was no better than a generic brand one would find at a grocery store.  Jeff, with just that little change you were telling your United loyalists that you did not care about the details; therefore, you did not compare about the customer.  The old United got it right, show the customers that you care enough about them to serve a premium, well-known coffee.  United was telling us customers that they cared about our morning cup of coffee.  It was a nice touch.  You all may have thought it was too expensive and that no one really cared, but the backlash you received said differently.  You responded by promising us a better cup of coffee, but it still not as good as Starbucks.  

The next change we were going to like was to the Mileage Plus system and the elite award levels.  Elite customers were now going to be Premier Silver, Premier Gold (formerly Premier Executive) or Premier Platinum (formerly 1-K).  Global Service would still be Global Services - you can't afford to piss them off.  With those changes though it was going to be more difficult to redeem mileage awards and secure an upgrade.  I don't even know or understand the new rules to get an upgrade, I just pay the first class fare, which I guess is what you want me to do.  The changes were necessary because, to quote another member of your "Team," John Rainey, "some customers had become over-entitled."  This was another change that we were supposed to like, but it became a change that you said was necessary because us customers from both United and Continental had become "over-entitled."

In 2010, I was a "Pass Plus" member with "1-K" status spending about $35,000 per year with United on travel just for myself.  Suddenly I had become over-entitled.  Well, Jeff my spending on United dropped to just under $5,000 in 2011.  I wanted to fly, but what you were doing with United was making my stomach turn, I just could not justify spending that kind of money anymore.  You had changed the routes, fleet and crew so much, there were no flights I wanted to take unless I had to.  At pre-merger United, the 3-cabin 777's and 767's that were flown cross county and between hubs had a purpose.  If you were going to fly in the first class cabin internationally, they wanted the customer to have that experience on all segment of their trip.  Those flights not only helped with positioning and getting more use out of the planes, but more importantly they were there to tell the premium customer that United cared enough to make their whole journey as nice as possible.  Those flights were full, customers sought them over the other flights to the same destination, and they were timed perfectly so that passengers could easily connect to their international flight out of Dulles, Chicago, San Francisco or Los Angeles.    They knew at pre-merger United that the demand for seats on those planes paid for those trips, and the margins they got from premium customers sitting in United First or Connoisseur class made those flights profitable.  I loved the 777 trans con flights and I always paid to sit up front, now that is all gone.  More often than not now, any trip I book domestically is going to be on a 737.  You are now telling your premium customer that if you want to go to Europe from Los Angeles, they are going to have to endure a cross country flight in a 737 to meet their connecting flight at Dulles or Newark.  You tell us it is a better utilization of the fleet.  I am sorry Jeff that you could not see the full picture and reasoning for putting those planes in the domestic schedule.  This is another change where you are telling us that you really do not care about our experience.

Most importantly, I still say the biggest problem and reason for customer defections is your failure to fully integrate your operations and get your people working together.  Many of the analysts weighing in on Thursday and Friday concurred.  You purposely segregate employee groups to do what is needed to reign in costs.  You don't care how demoralizing it is to those employees and you are blind to the fact that this divisiveness is felt and seen by the customers every day.  It makes us very uncomfortable.  This affects elite customers from both United and Continental.

Using a loophole in the Collective Bargaining Agreements, as older aircraft are retired, you layoff well-trained, experienced hard-working flight attendants on the United side, and then hire new, unpolished and inexperienced flight attendants to staff the new planes being put into service on the Continental side.  The only reason for doing so is because you are trying to break the resolve of United's Flight Attendants who only want to do the best for their customer and their airline.  You need more productivity out of them and you are determined to force it out of them rather than negotiate.  All of this divisiveness Jeff is noticed by the customers and they do not want to deal with it.  You are losing customers because you will not negotiate fairly with the employees.  

Two years ago, on the beverage napkins, you said, "Planes Change, but values don't - at United your priorities will always be ours."  As a customer my priority Jeff is to have the same respect from this United that I received from the pre-merger United.  That is not going to happen as long as you continue to treat the front-line employees as a line-item on the Income Statement that needs to come down.  How can you tell the customers that you care about them and their needs, when you cannot even do the same for those on the front-line keeping this airline flying.

So, yes Jeff, you are losing customers because of the coffee, the tulip, and the unfair treatment of employees.  You are also losing elite customers because any customer can buy elite status privileges when they book their ticket.  There is no longer a need to fly a minimum number of miles.  The United Club (formerly the Red Carpet and President's clubs) is no longer restricted to those of us who maintain annual memberships.  Any customer, for the right price, gets access to the club.  Now these clubs are no longer a refuge for the road warriors seeking some place to relax between connecting flights, or get some work done before their flight.  Again, another detail where you show you do not care about the elite flyers from both airlines.

Before the merger, United and Continental were good airlines; however, your arrogance is bringing them both down  There are 9 million passengers that used to fly United or Continental that are now flying on Delta or other newcomers like Virgin America and JetBlue, where they do care about some of the details, and the customers feel respected once again.  It is the little details that show your customers that you care about their lives and their experience while flying United.  When you stop placing importance in those details, you are telling your customer that you do not care.  

Paying an outside consulting company millions of dollars to retrain employees in customer service is not going to fix things or bring customers back.  A relatively new employee with only 2 years of experience cannot go around and start telling other employees about "route structure" to those employees who have been on the front-line for 45 to 50 years.  Bring back the Starbucks coffee, bring back the tulip, bring back the Friendships and Proud Birds, stop treating the employees as commodities and get back to respecting your elite flyers and their loyalty.  If you and your Board of Directors don't get this, then it is time for you all to step down.  I am going to do all I can to reach out to as many shareholders as possible to convince them that change is needed.  You got schooled this week Jeff and it was humiliating not only to you and your "yes" men; it was humiliating to shareholders, and it was humiliating to the customers that have remained loyal all this time.