United's low-cost carrier plan faces skepticism

By Susan Chandler
Chicago Tribune

The starfish's deceptive beauty hides the fact that the spiny creature is a ruthless hunter that pries open clams with brute force and sucks down their innards.

United Airlines gave the quirky internal code name Starfish to its plan for a new low-cost carrier intended to grab back market share lost to discount rivals.

United's chief executive, Glenn Tilton, says the nation's second-largest airline, which is trying to reorganize under bankruptcy court protection, has no alternative. It must answer the onslaught of low-cost competitors that include longtime nemesis Southwest Airlines as well as newcomers such as JetBlue Airways.

But Tilton has only a short time to figure things out, and the odds against Starfish's success are long. The list of defunct low-cost carriers that failed to crack Southwest's secret to success is lengthy.

Employee skepticism

Not surprisingly, Tilton's plan is meeting with more than the usual amount of skepticism from industry experts as well as United's beleaguered employees, who now are working for reduced wages and experiencing furloughs. Many of them were around when the shuttle by United, its first attempt at a discount airline, was launched with fanfare in 1994 only to fold quietly in 2001.

United's second try "doesn't make sense," said Aaron Gellman, a professor at Northwestern University's Transportation Center and the Kellogg School of Management. "United management should be focused on getting costs down for the kinds of service they offered before."

That's certainly the flight plan that American Airlines, the nation's largest carrier, is pursuing. American Chief Executive Officer Donald Carty told a Chicago business audience in February that creating a low-cost carrier "is a substrategy, not a major strategic thrust."

"We don't think it's the fundamental change needed to fix the business," he said.

So why are United executives taxiing down the low-cost runway again?

Price-sensitive leisure travel is where the growth is, Tilton said, and Southwest and its ilk just won't leave United alone.

United faces low-cost competition in 72 percent of its markets, a much higher percentage than when it launched the shuttle to stop Southwest's erosion of its market share on the West Coast.

Besides, United executives say they have learned lessons from their seven-year experience with the shuttle.

Starfish won't attempt the same high number of daily flights. And instead of being confined to the West Coast, United's low-cost carrier will be a national presence.

A potential route map shown to creditors shows Starfish would fly from Chicago's O'Hare International Airport to a host of cities in Florida as well as Phoenix, Las Vegas and Oakland, Calif.

Starfish also would fly from Denver to Minneapolis, Indianapolis and Kansas City. In yet-to-be-determined markets, United may offer the option of flying regular United or the low-cost carrier.

Altogether, United's low-cost division would fly to 37 cities and use 134 aircraft, about 30 percent of United's domestic fleet. The average flight would be 900 miles long, about 240 miles shorter than United's average domestic route today.

Congestion problem

But Starfish may not adequately address one of the biggest problems with the shuttle, industry experts warn.

In markets where United had major hubs, there were plenty of people who wanted to fly the low-cost shuttle, but the shuttle couldn't achieve quick turnarounds — landing and taking off again in 20 minutes— because the airports were congested. In the case of the San Francisco airport, dozens of shuttle flights were regularly scuttled by the Bay Area's legendary fog.

In less crowded markets, such as flights between Burbank, Calif., and Oakland, the shuttle met its turnaround targets but couldn't attract enough customers to make money.

"The simplest way to express it," said Doug Hacker, United's new strategy czar, "is the shuttle was never really able to achieve the

cost goals that were originally set out in the vision of what the shuttle should have been able to do."

The same may end up being said for Starfish, where the route map relies heavily on congested airports such as O'Hare, Denver and San Francisco, where weather-related delays are routine.

'B scale' wages

Meanwhile, the sheer scale of the low-cost operation has United's unions worried. Starfish employees would be paid less — providing much of the cost savings — so the plan would bring a second-tier wage known as a "B scale" to almost a third of the carrier.

Back in the shuttle days, only pilots were paid less and not by much. The major difference was they flew for more hours each day and usually got to go home at night. It was almost like a regular day job, which was so appealing that many senior pilots opted to fly the shuttle and take a pay cut.

Flight attendants working the shuttle were paid the same as their mainline counterparts. So were mechanics and baggage handlers.

This time, United will be seeking lower wages and fewer work rules from every employee group at Starfish. It's hinting that the broad changes in work rules would require a separate collective bargaining agreement — a sticking point with the unions, because it would undermine the power of seniority, the key to higher pay and greater prestige, especially for pilots.

Pilots, who still hold the largest chunk of United's nearly worthless shares, say they support the Starfish initiative, but they are vehemently opposed to a separate contract.

"We're in favor of a low-cost carrier, but we require it to be done within the existing collective bargaining agreement with United pilots on United's seniority list," said Scottie Clark, a spokeswoman for United pilots and a captain who flies Boeing 757s and 767s.

Allowing Starfish to operate with its own labor contracts would increase the chance that United could decide later to sell it off, Clark said.

"They're talking about taking 30 percent of flying from the people who have built this carrier. We just want to make sure it stays within the United family."

In fact, United's unions are so concerned about Tilton's overall strategy, or what they see as a lack of it, that they have held preliminary talks with former United Chief Executive Officer Gerald Greenwald about playing a role in leading United out of bankruptcy. Greenwald is now a partner with Greenbriar Equity Group, an investment firm in Rye, N.Y., focused on the global transportation industry.

Fear of total conversion

Some United employees are downright paranoid about Starfish. They believe that United's ultimate plan is to convert its entire domestic route system to the low-cost carrier, leaving the mainline carrier flying only international routes.

Such fears distort Starfish's message, United says.

United was built to serve frequent fliers, who remain the airline's most important and profitable customer segment.

"There are lots and lots of (routes) in the domestic market where the mainline product is exactly right," said Greg Taylor, United's senior vice president for planning.

"We're talking about the low-cost carrier being targeted at markets where the mainline product doesn't work."

But, he said, "The plan is designed with flexibility. No one knows with certainty what the future will hold."