BBT editor Paul Revel talks to United CEO Jeff Smisek about subsidised airlines, transatlantic competition, new products and growing in China
United Airlines, together with its regional brand United Express, operates more than 5,000 flights a day around the world. Including, as CEO Jeff Smisek points out when I meet him in London, 26 UK flights a day, of which 17 fly out of Heathrow. He is fairly sanguine about the highly competitive transatlantic market, and the challenges of capacity at Heathrow, where he’s competing with the joint ventures of Virgin-Delta and BA-American – United’s transatlantic JV is with Lufthansa.
“Obviously additional slots at Heathrow are scarce and difficult to obtain. We have been able to, but it does take time and significant amount of effort,” he says. “But that’s the same in any slot-controlled airport, Newark is the same. So we deal with that from time to time across the globe.”
He agrees the routes from Heathrow to New York and United’s other US hubs are “fiercely competitive”, but on the other hand they’re the routes with a lot of high-yield business traffic on them – “That’s what makes them so competitive – people go where the money is.” People want to go to Heathrow, he says, not Gatwick, citing the “huge amount of connectivity” between LHR and United’s Newark hub.
Skies the limit…
So, competition doesn’t faze Smisek, but what does get his goat at the moment is what he calls “state-subsidised airlines” taking market share. Asking him about the current Open Skies dispute between the ‘big-three’ US airlines and the ‘big three’ Gulf carriers is like lighting the blue touchpaper.
The US currently has 117 Open Skies treaties in place, and Smisek says “we have been great beneficiaries and great supporters – they’ve been wonderful for our business and our expansion internationally. As a result we’re a very successful global competitor from those treaties.” However the treaties with the UAE and Qatar have been “terribly abused” by those governments, he says. The treaties are premised on fair competition, and while there are other state-owned airlines with which he has no problem, these two governments “have used massive subsidies” that he says are twice the size of those reported by the World Trade Organisation in the Airbus-Boeing dispute.
“It’s aberrational, off the charts,” says Smisek. “These countries have no home markets at all, they rely entirely on taking traffic from others, through subsidies – whether subsidised pricing, product levels or marketing.” He adds that beyond the “indisputable, very conservative” figure of $42 billion over the past 10 years, “I suspect there are billions of additional dollars of additional subsidies buried in interested party transactions.”
United has joined rivals Delta and American Airlines to form the Partnership for Open & Fair Skies, a coalition lobbying the US government on the issue. “We’ve asked our government to sit down and talk to them about it. We’ve also asked government to freeze the capacity and frequency – and since we’ve started this process the Gulf carriers have announced 25 per cent more capacity, because they’re afraid the window’s going to close.”
I point out that the Gulf carriers claim that US airlines have also benefitted from vast levels of government support: Etihad has cited research claiming the US ‘big three’ received benefits worth $70 billion since 2000 – the majority of this in the form of Chapter 11 bankruptcy protection. “That’s an absurd argument,” Smisek replies. “Bankruptcy protection is not a subsidy whatsoever. The people who get hurt in bankruptcy are creditors and shareholders. If they want to talk about subsidies, we welcome that. Bring it on, we’ll win that argument all day long.”
Etihad CEO James Hogan has talked about the “dark clouds of protectionism” – are the US carriers being protectionist? “What we have here is a trade dispute,” says Smisek. “Our government has had a long-standing trade policy, that it won’t tolerate the dumping of subsidised goods into the US – whether that’s subsidised steel, cotton, strawberries, soya beans, or airline tickets. This is a pure trade dispute, not protectionism. We welcome competition and we don’t like protectionism. But we also expect our government to enforce its long-standing trade policies.”
The ‘big three’ US carriers have lobbied the government to freeze capacity and frequency of Gulf carriers
The subsidy dispute aside, most would agree that airlines operate in a challenging marketplace. So how does United differentiate itself from rivals? “Ultimately, you have to have competitive product,” says Smisek. “For example, the B767-300s, we are retrofitting those from nose to tail, with new flatbed business class seats, economy-plus and economy, wifi, streaming video. This will be a gorgeous and completely new product.” He says the first retrofitted aircraft will appear by the middle of 2016.
He adds: “Unlike some of our competitors, we’ve chosen to put satellite-based Wireless free internet access onboard, on our fleets so you can stay connected wherever you are in the world. That was a more difficult more expensive route to go. I had some teething pains to get it done – it’s bleeding edge technology and we got a little sliced occasionally… but now it’s up and running and its very good tech. And we’ve put back much better food in coach, free beer and wine, bottle of water, the sorts of things airlines had taken away. That makes us more competitive with global carriers in coach.”
The airline has also invested heavily in facilities, he says, citing the two “glorious” United lounges in Heathrow’s Terminal 2, and investment in United’s home hubs including a $500m facility in LAX and a new terminal in Houston, both under construction, as well as restaurants in Newark Liberty airport that feature 6,000 iPads for ordering food – which passengers can pay for using their Mileage Plus points.
China is an important market for United, says Smisek – and what’s helping the airline expand there is new aircraft technology. “United is the largest US carrier to China by far, twice our competitors. We recently started San Francisco to Chengdu. That’s a so-called secondary city – secondary cities in China have 8-10 million people – and we’re able to do this because of the efficiency of the B787, and take that commercial risk. Non-stop into city that’s never had service from US carrier. If it works, it will open up a number of other secondary markets – I can’t say which ones, we don’t want to leak that information to the competition. Aircraft like the 787 enable us to fly to destinations we otherwise wouldn’t.”
He adds that over time B777-300ERs will gradually replace the airline’s B747s, and while the B777X is not on order, it is a “potential product for us.”
One aircraft he won’t be buying is the A380. “That is a product for state-subsidised airlines, or airlines that have it and wish they didn’t,” he says. Another thing he doesn’t like is international first class. “It’s a money loser, and we will be eliminating it over time. For example the 767s that have it today, as they get retrofitted you will not see it reappear. The problem is that it takes a lot of real estate, and people are not willing to pay for that. I suspect the other carriers, apart from the subsidised Gulf airlines, would say the same thing.”
Apps and agents
Smisek is particularly enthusiastic about the United app. “We’re investing heavily in technology and control for consumers, we’ve had 20 million downloads of our app,” he says. “It’s superb, I know that because I use other people’s apps and ours is better.”
“And we’re upgrading it to implement a new journey management system, for irregular operations such as maintenance or weather problems, which will offer customers a far broader choice of service recovery options, which they can select through the app.”
Which brings us onto the thorny issue of distribution. Smisek won’t comment on JV partner and fellow Star Alliance member Lufthansa’s €16 GDS fee, nor will he comment on whether United is considering a similar move. But he’s happy to talk distribution generally. “My view is we want to be on as many distribution shelves as possible,” he says. “It’s great that our app and direct distribution is growing rapidly, because that’s a low-cost system for us. But if passengers want book through a high-touch travel agency that’s fine. Travel agents can deliver high-yield customers, we are always willing to pay for that.
“Philosophically I don’t have opposition to GDSs or travel agents. If they’re delivering value, they should be compensated. But when they demand more compensation than the value they deliver, we have to come to a more commercially reasonable solution.”
Jeff Smisek is chairman, president and chief executive officer of United Airlines.
Prior to this role, Jeff was chairman, president and chief executive officer of Continental Airlines, which merged with United in 2010. He joined Continental in 1995.
Smisek graduated from Princeton University in 1976 AB summa cum laude in economics, and from Harvard Law School, JD magna cum laude, in 1982.
He is married with two children, and supports several charitable organisations. He is on the board of directors of National Oilwell Varco, and the board of trustees of Rice University. In addition, he serves on the board of governors of IATA, and is chairman of the board of trade body Airlines for America.