It has been a rough few weeks for United Airlines, as the company probably wishes nothing more than to erase its recent mishaps, including the latest one involving questions over the death of a giant rabbit. This comes as the airline struggled to shake off an episode earlier this month in which a medical doctor, David Dao, was violently dragged off another flight at the Chicago Airport.
But as the carrier deals with another public relations fiasco this week, it’s worth reminding investors and anyone who have ever flown on United that these were isolated incidents. The airline deserves a closer look at its broader business operations.
As with any company, United is imperfect, but it is nonetheless one of the most efficient carriers in the business, according to analysis by Duke Corporate Education that looked at Financial Cycle Time (FCT), which is the average time it takes for airlines globally to turn $1 of investment into $1 of cash collected from a customer.
Financial cycle times tells investors how much a company invested in its operations and compares that to how much revenue those assets generated. In 2016, United generated almost double the sales with half the investment compared to American Airlines. United had invested $9.5 billion of capital to generate $36.6 billion in sales, while American Airlines invested $20 billion of capital to generate $40.2 billion in sales. This means United got more out of its planes, information systems, inventory and other assets. Said another way, United is turning $1 of investment into $1 of sales every 95 days in 2016. American turns $1 of investment into $1 of sales in 181 days or almost twice as long. This demonstrates United’s financial productivity as they either get more out of similar resources or they can use fewer resources to accomplish more things.
Below is a table of US airlines productivity measured by Financial Cycle Time in 2016:
In this case, United is not the largest airline by revenue, but it is more efficient with its resources and processes than its larger peers. Given the figures in the table, it’s easy to see why United’s productivity gains have been recognized by investors since it does more with less and it has seen its stock price rise 45% in one year as of April 26, 2017.
When United CEO Oscar Munoz took over the airline in 2015, he inherited an incomplete merger with Continental. Munoz needed to merge the company’s businesses, processes and operations — a tough task for any executive walking into a new job. A year into his role, he agreed to higher wages with the various unions to create one true airline with common processes and reduced variation. This led to a quantum leap in productivity which led to an improving Financial Cycle Time.
In order to accomplish the productivity improvements, Munoz drove standardization of processes. Everything needed to be done more consistently and without deviation – as deviations would slow things down. These were good intentions. But in practice, this meant that employees were handcuffed into following strict processes even when they knew exceptions should be made. United went too far in its drive to improve efficiency and Dao and the rabbit were victims of this demand for standardization.
To continue to be successful, United must demonstrate a better balance between efficiency and empowerment of employees, without sacrificing consistency or customer satisfaction. Employees should be given back the ability to resolve unexpected deviations to the process. Over time, this capability is critical to sustaining the financial advantages the airline has recently achieved.
For many companies, United’s PR crisis would have been the beginning of a death spiral. But Munoz and his company can weather the storm because, among other reasons, United has a productivity advantage, allowing it to move faster to solve challenges. On April 27, United announced a 10-point response plan to address underlying customer issues. Among the changes: creating a customer response team to address deviations, training employees on how to deal with exceptions and building flexibility into employee apps to proactively give out miles or other compensation to customers experiencing challenges. Employees will now be empowered to make judgment calls in real time and manage exceptions. This is a positive development in United’s evolution towards sustainability.
Joe Perfetti is a lecturer in Finance at the University of Maryland and an adjunct professor of Law at Georgetown University. He is also an educator with Duke Corporate Education, a global provider of customized education. Kathy Pearson is president and founder of Enterprise Learning Solutions and is an educator with Duke Corporate Education. Neither authors are investors in United Airlines or other companies in this article.
