Strategic Report

Ariana Schuster Linda Hahn Jason Hathaway April 20, 2005

United Airlines

Table of Contents

Executive Summary ...... 2

Company History ...... 3

Competitive Analysis ...... 5

Internal Rivalry...... 5

Substitutes and Complements...... 6

Supplier and Buyer Power...... 6

Entry and Exit ...... 8

Financial Analysis ...... 9

Key Issues and Solutions...... 14

Conclusion ...... 17

References ...... 18

SageGroup, LLP 1 United Airlines

Executive Summary

United Airlines, one of the airline industry’s leading competitors, has suffered substantial financial damages over the past several years. The terrorist attacks of September 11, 2001 hit the airline industry hard, and while other top airlines were able to withstand the strain of this industry decline, United has had a particularly rough time. Immediately after September 11th, United began to experience significant financial losses, and by December of 2002, the airline had lost so much revenue that it was forced to declare Chapter 11 bankruptcy for government protection. Since 2002, United has engaged in a number of cost cutting strategies in order to become a more competitive player in the airline market and to acquire enough revenue to be able to emerge from its state of protected bankruptcy as soon as it can. Thus far, though, the Company has remained unsuccessful and has been forced to continue to apply for extensions to lengthen the amount of time that it can stay under government protection. At this time it has become evident that United must make some significant cuts in its costs of operation if it is to emerge from bankruptcy before the government terminates protection. In this report, SageGroup, LLP recommends that the Company continue its cost-cutting efforts by reducing the costs of labor (including employee pension plans and wages), eliminating unprofitable routes from its offered services, and reducing its sensitivity to the rapidly increasing prices of oil. If it is able to accomplish these tasks and cut costs by at least $2 billion, it should be in a position to healthily emerge from bankruptcy by fall of 2005.

SageGroup, LLP 2 United Airlines

Company History

The 1920s was a booming era in United States history of significant development and prosperity. It was during this time that the field of aviation was launched, as it established the foundation for what has become one of the modern transportation industry’s major operations. Following the ingenuity of the Wright brothers around the turn of the century, aviation services for commercial transportation began to gain prominence. But it was when Walter Varney, the founder of the United Airlines predecessor company, established an air mail service in 1926 that the industry of commercial aviation began to take flight. With the introduction of stewardesses in 1930 and the merging of aircraft manufacturers and airport operators into large corporations, United materialized as an independent air transport corporation and began to set its own course in commercial aviation. By the 1940s, United was a well-established air transport corporation; however, with World War II at the forefront of international affairs, the Company shifted its focus to war aircraft production, crew training, and mail service to serve the U.S. military; ultimately, the Company flew thousands of flights during the course of the war. The post-war boom led to a significant rise in the demand for public air travel. With the establishment of Denver as its hub and the introduction of the jet aircraft, United began a momentous 29-year period of growth. After merging with Capital Airlines, the United States’ fifth largest air transport company, United quickly became the world’s largest commercial transportation airline. It was also during this period that UAL, Inc. formed, becoming the holding company of United Airlines, thereby allowing United to diversify and expand beyond the realm of air transportation. In 1970, however, United’s sunny past darkened. The company posted a loss of $46 million as a result of higher costs, lower fares, a flattened market, a failed bid for international routes, and the premature introduction of the jumbo Boeing 747. This downturn stimulated a sequence of six new Company presidents throughout the 1980s, a name change to the Allegis Corporation in 1986 and then to the UAL Corporation in 1988, and a revamped image.

SageGroup, LLP 3 United Airlines

By the beginning of the 1990s, United had become a major international carrier, but its story changed once again with the rise in fuel prices following the Persian Gulf crisis. By 1992, UAL posted a net loss of $957 million. United was forced to undertake cost-cutting strategies to remain competitive, such as the establishment of its ESOP, an Employee Stock Ownership Plan, in which 55,000 employees traded portions of their salaries for company stock. This move enabled United to become the largest employee majority-owned corporation in the world. In 1994, following the creation of ESOP, United stockholders made the uncommon move of adding representatives from the International Association of Machinists and the Air Line Pilots Association to its board of directors. In 1997 the Airline formed a partnership with Air Canada, Lufthansa, SAS and Thai Airways (and later that year, Varig) to create Star Alliance: the airline network for the earth. This move positioned the Company once again as a leader in the industry. Unfortunately, the economic recession that accompanied the turn of the century quickly shattered United’s regained hope for success. A decline in business forced the corporation into labor negotiations with its pilots and machinists, who were demanding higher wages, and when United proposed a merger with US Airways, complications with labor issues and air traffic congestion led to the cutting of 7,000 flights. Through 2001, United was able to make some technological enhancements to its services, but the severe drop in air travel resulting from the tragedy of September 11th forced the corporation to economize by releasing 20,000 employees. Fiscal year 2001 ended with a record loss of $2.1 billion, and 2002 was continued in a downward spiral towards the Company’s eventual declaration of bankruptcy in December of that year. Since 2002, United has been frantically scrounging for strategies to stay afloat and emerge from its state of protected Chapter 11 bankruptcy. It has restructured its cost and employee payment plans, and while analysts have varying opinions about the Company’s prospects for survival, United officials are optimistic and intend to emerge from bankruptcy within the year.

SageGroup, LLP 4 United Airlines

Competitive Analysis

This section provides an analysis of United’s position within the airline industry, specifically in terms of how activity in the rest of the industry affects United’s mobility and power. This can be done most effectively by using Michael Porter’s Five Forces (Internal Rivalry, Substitutes and Complements, Supplier Power, Buyer Power, and Entry), which will identify the threats to profit that the firm faces within the industry. Overall, this analysis shows that United is in a position of high risk and should take action in areas such as internal rivalry and supplier power if it wishes to regain its status as a leader in the airline industry.

Internal Rivalry

The airline industry is highly competitive with many sellers in the market, most of which offering undifferentiated services. While the older, more traditional carriers are struggling to stay afloat with the old “hub-and-spoke” system, new low- cost “point-to-point” carriers are emerging and attracting customers by offering lower fares and more direct routes with fewer layovers. The hub-and-spoke system functions with each major carrier having a few central airports, through which most of their flights pass and then branch out to specialized destinations. United’s hub locations are Chicago, Denver, Los Angeles, San Francisco, and Washington, D.C. While the hub-and-spoke system has been effective for the major carriers over the past decades, a few newer airlines have been able to reduce their costs by introducing services only between certain high-profit destinations. Southwest and Jetblue, the industry’s leading domestic low-cost carriers, have engaged in this strategy further and even reduced costs by operating out of select secondary airports with lower airport fees, having a limited variety of aircraft, and offering limited services to passengers such as no on-board food service and, in Southwest’s case, no pre-assigned seating. These carriers have quick turn-around times in airports and are able to charge their customers lower fares than the more traditional airlines, thereby increasing their profits and making them a high threat in the industry. Internationally, this has also become an issue, and in the case of RyanAir, Europe’s leading low cost carrier, airports actually pay the airline to occupy terminal space. Along with these intense increases in competition, the emergence of the internet as a way for consumers to make fast and easy price

SageGroup, LLP 5 United Airlines comparisons and ticket purchases, brand loyalty for rewards programs has dropped in favor of flight-by-flight shopping by customers for the lowest fare possible. These low switching costs contribute to the high amount of price competition within the industry.

Substitutes and Complements

Air transportation has no direct substitutes for all occasions, but train, bus, and automobile travel may be alternatives in some situations. Air travel is very geography-sensitive. If an individual needs to travel across the United States for either business or leisure, it is unlikely that any other form of transportation will be comparably efficient in terms of time or comfort. Train, bus, or car travel may become viable options in centralized, well-serviced areas, such as routes among major cities in the Northeast. For traveling internationally, there is virtually no feasible alternative to plane travel. Although in most cases air travel is more expensive than any of its substitutes, the benefits in efficiency generally outweigh the costs for most consumers Complements to air transportation are less clear and may have less sway in influencing a person’s decision to travel (especially in the case of business travel), but they are certainly worth mentioning. Potential complements are car rental prices, hotel prices, airplane and airport services such as food availability, and any benefits associated with tourism in a given period that encourage people to travel more frequently.

Supplier and Buyer Power

Supplier Power Supplier power is one of the major areas in which United may have potential for reversing its poor performance over the past few years. Due to the high fixed costs of operation in the airline industry, differences in labor costs can create significant gaps in the profitability of older versus newer airlines. When exploring the issue of labor, it is necessary to evaluate the differences in productivity between employees of differing tenures. In the case of pilots or flight attendants, for example, there is not going to be a significant difference in the productivity of employees who have been with the Company for one year versus those that have been there for 20 years. Despite this fact, United compensates these equally SageGroup, LLP 6 United Airlines productive workers vastly differently. Where this becomes a problem is when United is competing with newer airlines that do not even have employees that have been employed for 20 years. The newer airlines are at a direct advantage, and United has an incentive to reconsider its cost structure. In terms of aircraft suppliers, United’s fleet of planes consists of a combination of Boeing and Airbus jets. Boeing provides United with all of its wide- body aircraft, while Airbus provides the relatively smaller planes used primarily for domestic travel. Because of this duopoly in the market of aircraft producers, prices for aircraft remain relatively high, yet the suppliers must work to maintain a compatible relationship with United given the ease with which United could eliminate one of them. Depending on how you measure it, United comes in as one of the top three airlines in the world, so the loss of its business would be treacherous for either of these aircraft providers. Since there are currently no close substitutes for the planes that Boeing and Airbus manufacture, though, United is heavily dependent on their production and consistency. United is also dependent on fuel suppliers, as fuel is its second largest cost behind labor. As noted in United’s 2004 10-K filing:

“The price and availability of jet fuel significantly affect our operations. For example, at 2003 fuel consumption levels, we estimate that every $0.01 change in the average annual price- per-gallon of jet fuel will impact our fuel costs by approximately $22 million (all other things being equal). Due to the highly competitive nature of the airline industry, we may be unable to pass on to our customers any increased fuel costs that we encounter.”

Overall, the airline industry has seen a significant rise in airline fuel cost and consumption since 2002, with the lowest fuel cost being around $0.70 per gallon in 2002 and the highest cost near $1.25 per gallon in 2005. This has clearly resulted in significant cost increases for United as well as its competitors.

SageGroup, LLP 7 United Airlines

Buyer Power With the increase in Internet utilization over the last ten years as a means for shopping competitively for airline tickets, buyer power in the airline industry has swelled. Customers are now opting to search independently of travel agents for the cheapest fares, forcing airlines to offer competitive prices to consumers whose brand loyalty is decreasing. Additionally, the traditional methods of airline price discrimination cannot be practiced to the same degree that they once were due to the transparency of Internet prices and consumers’ ability to capitalize on last- minute deals. This is a very important issue for United, causing the Company to reevaluate its pricing strategies. While some strategists believe that there is room in the market for United to serve less defined routes at lower costs, it is currently unclear how and when such a strategy will materialize.

Entry and Exit

Fortunately for United, a well-established airline, entry into the domestic airline industry for new carriers is not easy. A large stock of capital (principally aircraft) is necessary, and rights to airport space and domestic and international routes can be both expensive and difficult to obtain. These barriers have diminished significantly, though, in the last few decades since the deregulation of the airline industry in 1978. Also, since new carriers have capitalized on utilizing secondary airports, they have cut their costs, allowing them to gain prominence in the industry relatively quickly. While all of the major carriers are vulnerable to the possibility of new carriers entering the market, United could be at a higher risk because of its airport concentration. With the significant portion of United’s business being served through its Chicago hub, if a new carrier was by chance to also enter the Chicago market specifically, the impact on United would be great, placing the Company at a clear disadvantage. Comparable to the significant barriers to entry, there are also a number of exit barriers in the airline industry that have contributed to the high level of competition. Each carrier invests in a huge amount in capital and acquires a consumer-base by offering advantages for loyal customers, so the liquidation of these vast assets poses a great challenge.

SageGroup, LLP 8 United Airlines

Financial Analysis

United has experienced a rough turn of events over the past several years. While it hovered just below the industry average in stock price through most of 2001, the terrorist attacks of September 11th hit UAL Corp. harder than any of its direct competitors (namely American Airlines, British Airways, and Delta Airlines) [FIGURE 1]. Since that time, United’s stock price, market capitalization, and operating revenues have consistently declined, resulting in the Company’s filing for Chapter 11 Bankruptcy in December of 2002.

Figure 1 DOW JONES INDUSTRY INDEX (AIR Weekly)

In response to September 11th, United was able to take several cost-reducing measures, including condensing its flight schedule, retiring aircraft and halting new aircraft deliveries, reducing planned capital spending, eliminating some commissions paid to travel agencies, and downsizing its workforce. Unfortunately these measures were not enough to maintain cash reserves at a reasonable level, and when the Air Transportation Stabilization Board denied United’s proposal for a federal loan guarantee, it was forced to file for bankruptcy as a last resort. In the years after declaring bankruptcy, United has been able to make some headway in its business operations by restructuring several facets of the corporation. It negotiated new contracts with each of its unions, which have led to

SageGroup, LLP 9 United Airlines

labor cost reductions of approximately $2.5 billion thus far. It has also undergone cost-saving ticket policy changes, among other production and strategy initiatives, with expected profit improvements of $1.4 billion. In addition, United has restructured its aircraft fleet ownership rate, moving towards an increase in leased planes and a decrease in owned equipment. On account of its aircraft restructuring, with an estimated average annual cost savings of about $900 million, combined with the $2.5 billion labor cost reductions and the $1.4 billion savings from the business transformation initiatives, United projects annual cash savings of $5 billion by the end of this year. Although these cost reductions are significant, current management estimates show that the airline will need at least another $2 billion in order to have the financing necessary to exit bankruptcy.

SELECTED FINANCIAL DATA AND OPERATING STATISTICS

(In Millions, Except Per Share and Rates) Year Ended December 31

2003 2002 2001 2000 1999

Income Statement Data:

Operating revenues $ 13,724 $ 14,286 $ 16,138 $ 19,352 $ 18,027

Earnings (loss) before extraordinary item

and cumulative effect (2,808) (3,212) (2,137) 265 1,238

Net earnings (loss) (2,808) (3,212) (2,145) 50 1,235

Per share amounts, diluted:

Earnings (loss) before extraordinary

item and cumulative effect (27.36) (53.55) (39.90) 1.89 9.97

Net earnings (loss) (27.36) (53.55) (40.04) 0.04 9.94

Cash dividends declared per common share - - 0.36 1.25 -

Other Information:

Total assets at year-end $ 21,979 $ 23,656 $ 25,197 $ 24,355 $ 20,963

Long-term debt and capital lease

obligations, including current portion,

and redeemable preferred stock 852 700 10,117 7,487 5,369

Liabilities subject to compromise 13,964 13,833 - - -

Revenue passengers 66 69 75 85 87

SageGroup, LLP 10 United Airlines

Revenue passenger miles 104,464 109,460 116,635 126,933 125,465

Available seat miles 136,630 148,827 164,849 175,485 176,686

Passenger load factor 76.5% 73.5% 70.8% 72.3% 71.0%

Breakeven passenger load factor 87.6% 92.3% 90.1% 69.4% 64.9%

Passenger revenue per passenger mile 10.6¢ 10.8¢ 11.7¢ 13.3¢ 12.5¢

Operating revenue per available seat mile 9.4¢ 9.4¢ 9.8¢ 11.0¢ 10.2¢

Operating expense per available seat mile 10.5¢ 11.4¢ 12.0¢ 10.6¢ 9.4¢

Fuel gallons consumed 2,202 2,458 2,861 3,101 3,065

Average price per gallon of jet

fuel, including tax 94.1¢ 78.2¢ 86.5¢ 81.0¢ 57.9¢

Despite United’s relatively good performance in 1999 and 2000 with net earnings of $1.2 billion and $50 million, respectively, 2001 and 2002 yielded substantial net losses of $2.1 billion and $3.2 billion. By 2003, some of its competitors were able to reverse their losses and realize positive earnings, but United continued to suffer with a loss of $2.8 billion. Although the Company has experienced losses in passenger revenues, it has occurred at diminishing rates: 11.8% from 2000 to 2001; 8% from 2001 to 2002; and 5.8% from 2002 to 2003. Over the past two years, United’s stock price has hovered in the range of $1 to $2, with a high of $3.70 in March of 2004 and a low of $0.12 in September [FIGURE 2]. Its market capitalization is $117.38 million, the lowest among its competitors, with Delta reporting $600.48 million, American at $1.37 billion, and British Airways at $5.57 billion. It is also the only company in the industry to still be experiencing negative revenue growth (-11.50%).

SageGroup, LLP 11 United Airlines

Figure 2

UALAQ.OB AMR BAB DAL Industry

Market Cap: 117.38M 1.37B 5.57B 600.46M 701.26M

Employees: 58,900 92,100 51,939 70,600 5.96K

Rev. Growth (ttm): -11.50% 0.80% 13.50% 0.00% 13.50%

Revenue (ttm): 16.14B 18.65B 14.40B 14.97B 1.46B

Gross Margin (ttm): 9.90% 18.91% 22.64% 4.61% 19.69%

EBITDA (ttm): -105.00M 1.15B 2.23B -208.00M 119.37M

Oper. Margins (ttm): -6.17% -0.77% 6.84% -9.71% 3.65%

Net Income (ttm): -1.44B -760.00M 542.40M -3.34B 12.00M

EPS (ttm): -13.003 -4.731 4.906 -26.757 0.35

PE (ttm): N/A N/A 10.49 N/A 12.98

PEG (ttm): N/A N/A N/A N/A 1.59

PS (ttm): 0.01 0.07 0.39 0.04 0.40

SageGroup, LLP 12 United Airlines

In terms of profitability, United trails the airline industry by a substantial amount in its gross margin, operating margin, and net margin percentages. Among those measures, the Company has managed to obtain a positive margin in only the gross margin measure. United’s beta is 2.65, indicating that it bears 265% of the risk of the overall stock market. In other words, a 1% increase in the price of the market will correspond to a 2.65% increase in United’s stock price, an enormous and dangerous degree of volatility. United has a current ratio of 0.642 meaning that its current assets only amount to 64.2% of its current liabilities.

Valuation Ratios Financial Strength (mrq) UALAQ Industry UALAQ Industry P/E (ttm) N/A 32.7 Quick Ratio 0.4 0.9 P/Sales (ttm) 0.01 1.2 Current Ratio 0.642 1.19 P/Book (mrq) N/A 2.15 LT Debt/Equity N/A 1.08 P/Cash Flow (mrq) N/A 12.71 Total Debt/Equity N/A 1.19 Beta 2.65 1.3

Profitability (ttm) Mgt. Effectiveness (ttm) UALAQ Industry UALAQ Industry Gross Margin % 9.9 26.17 Return on Invstmt % -9.33 3.03 Operating Margin % -6.17% 5.86 Return on Assets % -6.62% 1.15 Net Profit Margin % -8.92% 4.37 Return on Equity % N/A 4.49

All in all, United appears to be in a very risky position. It trails the airline industry in basically every measure of profit, growth, and economic health. Its stock price has fallen drastically and continues to be extremely sensitive to any changes in the market. United has continued to obtain extensions for its time allotment to emerge from bankruptcy, but unless it is able to make a drastic change in savings soon, its prospects for survival will surely be glum.

SageGroup, LLP 13 United Airlines

Key Issues and Solutions

At this point in time, United’s main obstacle is determining the most effective strategy to be able to emerge from Chapter 11 bankruptcy as quickly as possible. The airline has concluded that the best way to do this is by cutting operating costs drastically and it has been engaging in cost-cutting strategies regularly since declaring bankruptcy in December of 2002. If the Company can maintain and increase its success in reducing the costs of labor, the costs of unprofitable routes, and the costs of rising oil prices, it should be in a strong position to emerge within the next year. According to Standard and Poor’s November 2004 survey of the airline industry, if United is forced to liquidate, the increased capacity for other carriers would greatly benefit the rest of the airline industry; if United is able to emerge from bankruptcy, though, it should be in a stronger position and a vigorous competitor within the industry.

Issue 1: Labor Costs The cost of labor is, across the board, the single highest expense for airlines, amounting to about 40% of total costs, industry-wide. Since declaring Chapter 11 bankruptcy in 2002, United has taken a number of successful steps in its attempt to cut its labor costs. All of its employees have suffered wage and benefit cuts and the Company has worked to restructure negations with each of the six labor unions to which its employees belong, yet United is still amidst an arduous fight to accumulate enough profit to emerge successfully. In recent weeks, CEO Glenn Tilton declared that United will be terminating the pension plans of its employees and tear up the collective bargaining agreements it has with its mechanics and the machinist’s union if employees don’t agree to the newly proposed permanent pay- cuts. United is proposing to replace the pension plans with a less costly retirement plan such as the 401k. United officials hope that this move will provide the necessary $2 - $2.5 billion to exit bankruptcy by fall 2005. It seems that although United has already taken a number of measures to cut labor costs in the past couple of years, none of its moves have been drastic enough to allow the Company to be in a strong enough financial position to emerge from bankruptcy. This latest proposal should provide substantial funding, but the hurdle is going to be in getting agreement from its 63,000 employees who will be

SageGroup, LLP 14 United Airlines losing their contracted pension plans on top of the losses they have suffered already. If United can determine a way to ease the burden this move will place on its affected employees, the plan should be effective. This may include providing other less costly benefits or guarantees for future reimbursement for lost income. If the airline does not engage in these security measures towards its employees, though there are likely to be unionized strikes, which have already been making appearances and will be difficult to impede.

Issue 2: Unprofitable Routes As low-cost, point-to-point carriers begin to dominate the airline industry, traditional hub-and-spoke carriers like United are more strongly feeling the financial burden of their less profitable routes. Carriers like Southwest and JetBlue have been able to undercut other airlines by focusing their efforts exclusively on popular routes with capacity for growth. Also, as Standard and Poor’s survey of the industry notes, a significant portion of the costs of flight derive from landing and taking off. The point-to-point system has allowed carriers to eliminate the constant switching of aircraft in hub terminals that produces greater numbers of short flights with higher total costs. United has taken several measures to combat the high relative costs of the hub-and-spoke system and unprofitable routes. In February of this year, United launched Ted, its own division of a low-cost, low-frills choice for air travel. It has also begun to unload flights on United Express, Air Wisconsin, and SkyWest to a new group of regional carriers. These actions are moving United in the right direction. If it can continue to move away from its least profitable routes by letting other carriers take over, and at the same time increase services in highly profitable routes, the airline should see some increased profits that will hopefully contribute to its rapid emergence from bankruptcy.

Issue 3: Sensitivity to High Oil Prices Oil prices have been growing steadily in recent years, and this has placed a significant financial strain on not only United, but all airlines. Standard and Poor attributes the increase in oil prices to the war in Iraq, increased consumption, concerns about oil supply, and a weak dollar relative to foreign currencies. As of October, oil was at an all-time high price of $50 per barrel, a 60% increase from SageGroup, LLP 15 United Airlines

October one year earlier. Other airlines have been very successful at evading some of these rising costs by signing fuel-hedging agreements. Unfortunately, due to United’s status of Chapter 11 bankruptcy, it has a limited ability to partake in these agreements. This lack of opportunity has only caused further damage to United’s financial situation as other fortunate airlines have reduced their costs relative to the industry norms. United must come up with a plan to lower its sensitivity to the price of foreign oil, on which it is currently heavily dependent. One strategy United may want to consider is working with a first line investment bank that will do the hedging transaction for the Company. Under this scenario, the investment bank will be able to sell the reduced price oil to United for a fee. This strategy can only be successful, though, if United has the funds to hire such a firm, can pay the upfront costs, and if the prices of oil continue to rise. If the Company engages in this tactic and the price of oil subsequently falls, it will find itself in a serious position of financial obligation that it certainly cannot afford at this point in time.

SageGroup, LLP 16 United Airlines

Conclusion

United Airlines has suffered substantially over the past several years and is certainly not flying in clear skies yet. With one of the largest stocks of capital, an enormous employee base, and incredible airport terminal access, there would be a huge number of obstacles if it chose to give up right now and liquidate its resources. Meanwhile, the Company has not yet been able to develop and execute a plan successful enough to grant it substantial funding to emerge from its government protected state of Chapter 11 bankruptcy. While the airline has fought to renegotiate payment plans with its 63,000 employees, 78% of whom are unionized and who own 55% of the Company, relations between workers, the six unions to which they belong, and Company officials have become increasingly vulnerable and variable. At this point in time, it appears that the only viable option is for United to continue its struggle to acquire the means to emerge from bankruptcy before the government pulls the plug on its support of the airline, terminating the numerous extensions it has granted over the past two years. Thus United must develop a strategy that will allow it to reduce its costs significantly and quickly. SageGroup, LLP has proposed that the airline follow through with its proposal to replace the pension plans of its employees with cheaper 401k contracts, with the possibility of reimbursing participants with the lost benefits when the Company regains financial strength. Additionally, United needs to eliminate routes from its service that are high-cost and low-revenue. Whether these are routes flown by United or by one of its subsidiaries, the faster that it can unload costly routes, the more it will be able to focus on the expansion of its high- demand, high-profit services. Furthermore, as low-cost carriers begin to dominate the airline industry, United will be operating at a disadvantage based on its traditional flight structure, so any measures it can take that will help its low-cost subsidiary, Ted, gain market prominence will be important. Finally, with a heavy dependence on foreign oil for fuel, United must develop a system to lower its sensitivity to oil’s rapidly increasing prices. By taking these steps, United should hopefully be in a position to emerge as a successful competitor in the industry and maintain its strength for years to come.

SageGroup, LLP 17 United Airlines

References

Aviation Week and Space Technology, 2004.

Besanko, David, et al. Economics of Strategy. Indianapolis: Wiley, August 2003. www.bigcharts.com.

Bureau of Transportation Statistics, www.bts.gov.

Business and Company Resource Center

Fisher, Kent: Strategic Advisor.

Hoovers Online, www.hoovers.com.

Reuters Online

Standard and Poor’s, Airlines Industry Analyst Report. November, 2004.

United Airlines 10-K Filing, 2004.

United Airlines Website, www.united.com.

Yahoo! Finance, www.finance.yahoo.com.

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