United Expects Payoff From Attention to Higher-Fare Fliers

Feb. 24, 2006
United Airlines is focusing its efforts to improve profitability by going where the money is--first-class and business-class customers willing to pay more for extras.

Feb. 23 -- United Airlines is focusing its efforts to improve profitability by going where the money is--first-class and business-class customers willing to pay more for extras, Jake Brace, chief financial officer, told investment analysts Wednesday.

"We're not going to ignore the low-value customer, but we're going to try and generate a revenue premium from the high-value customer," Brace said in a Webcast of the event. "And the early signs of that are very promising."

For example, the Elk Grove Township--based carrier has reduced costs associated with serving coach-section customers by having them pay for services, including food. Customers who are not elite members of the frequent-flier program pay a fee when redeeming mileage awards over the telephone. And the airline recently began charging for alcohol in the economy section on flights across the Atlantic Ocean and to Latin America.

"We are judiciously taking money and investing it in the high-value customer, and at the same time we are not spending any more than we have to on the low-value customer," Brace said.

His comments came at an aviation industry conference sponsored by JPMorgan Chase & Co.

The two-day session gives airline leaders the opportunity to describe their business strategy and business plan to influential analysts.

Executives at Southwest Airlines and JetBlue Airlines, two of the nation's largest discount carriers, each said fare increases are likely this year in the face of higher fuel prices. Although prices have dropped from record highs last year, fuel prices remain more than 50 percent higher than in 2004.United emerged from three years in bankruptcy at the beginning of this month. The airline eliminated $7 billion in average annual cost savings during its time under court protection but expects to cut another $300 million this year through increased productivity, Brace said.

The airline's plans include increased automation and outsourcing of call-center operations, improving schedule coordination and tightening the amount of time between landings and takeoffs.

United plans improvements to first- and business-class on international flights and a revision of elite-customer benefits, executives said. It remains committed to Economy Plus, a section of coach class with expanded legroom. Passengers paying to upgrade to Economy Plus will bring in about $50 million in additional revenue this year, Brace said.

Chief Executive Glenn Tilton said he believes airline consolidation is inevitable, and that United will consider acquisitions that make sense for its bottom line.

"One thing this company won't do is sit by idly and watch the consolidation take place without taking advantage of the opportunity," Tilton said. Given the right opportunity, "we'll be making the recommendation to our board that we should participate," he said.

He did not say which competitors would pique United's interest. The airline left bankruptcy with more than $3 billion in available cash.

Two of the nation's largest carriers, Northwest Airlines and Delta Air Lines, are reorganizing in bankruptcy, and some analysts have said that one or both may not survive if they are unable to bring their costs under control.

The most recent large merger in the airline sector occurred last year when US Airways emerged from bankruptcy and combined with discount carrier America [email protected]

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