United CEO: Adding More Fare Options Key To Success
Photo courtesy of United Airlines
In a call with investors on Tuesday, United Airlines CEO Oscar Munoz laid out a plan to improve his airline's financial performance. Since returning to work after a heart attack and dealing with activist investors who were partially successful in replacing some members of the board of directors, Munoz has been trying to show that he is capable of changing United's fortunes.
The biggest part of the plan Munoz detailed on Tuesday involves segmenting fares so that every type of flier can find prices and services that fit their needs. Munoz has promised that his changes will bring in more than $3 billion over the next three years. Almost half of that additional income will come from segmentation.
More fare options
This is not a new idea. Delta and American have also been adding fare classes to their list of options, which now include basic economy and premium economy (on some flights). The goal in doing this is to maximize the amount of seat revenue that a flight can earn. The idea is that some fliers shop only based on price and are willing to be scrunched in a middle seat in economy class if they think they are getting a good deal, while others are willing to pay a little bit more if it means that they get to enjoy a higher level of comfort and service.
United's changes will be taking place on all price levels. At the high end, the new United Polaris class is launching later this year. The state-of-the-art seating and additional services will, ideally, draw more high-paying fliers who are willing to shell out extra for a good product.
Basic economy fares could end competition from low cost carriers
On the other end of the spectrum are basic economy fares. These no-frills tickets are similar to those offered by ultra-budget airlines. They will allow United to compete with airlines like Frontier and Spirit without having to lower all their fares across the board. By reserving two dozen no-frills seats, for example, on a given flight, United can steal passengers who would have otherwise opted for a Spirit flight without having to sacrifice income from passengers who are willing to pay a full economy class fare. This will allow the airline to maximize revenue on each flight.
Munoz has laid out an ambitious timeline for these changes. Polaris will be appearing on United's wide body planes in December of this year.
Other changes also on the horizon
Munoz also mentioned other changes. The airline has altered its MileagePlus program so that rewards are based on dollars spent, not miles flown. This will give United more control over its rewards budget. There are also plans to increase airplanes' capacity by adding slimmer seats. This could help reduce the loses in seat revenue that United is currently experiencing.
United will also be revisiting some of its routes and could shift service to other cities so that it can better balance capacity with demand.
What did investors think of this?
United stock was up after the Munoz call. By the middle of Tuesday, shares had risen by $1.22 for the day. So shareholders see it as positive news that Munoz at least has some sort of coherent plan to improve his airline's financial performance. At the same time, some analysts think that the timeline for these improvements and the $3.1 billion in three years is overly ambitious.
More by Josh Lew
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